China, Corporate Governance and CSR - Saturday, December 10, 2011 20:49 - 0 Comments

China’s accounting standards: a dilemma for the big four

IFR Asia, December 2011

China, it’s widely agreed, is the new engine of world growth. But it’s an engine that might need some tuning. As one industry after another – banking, telecoms, resources – gains new global champions from mainland China, some less esteemed names and practices are being pulled into the international spotlight along with them.

Bankers are watching this with some alarm, but really it’s international accountants who have most to worry about. So far this year, three of the big four accountancy groups have either been caught up in controversy about their overseas-listed clients’ accounts, or have stepped away from a client out of growing concern about their books.

The biggest incident involved Sino-Forest, a Chinese timber company that listed on the Toronto Stock Exchange in the 1990s and grew to become one of the largest forestry groups listed in Canada. It appeared a success story, raising more than C$3 billion in debt and equity over the years and reaching a market capitalization of C$6 billion by March this year, reporting almost C$400 million in profit for 2010 from a 780,000 hectare forestry portfolio in China. But following a damningly negative research report from a hedge fund, triggering a share price plunge, it was suspended from trading by the Ontario Securities Commission in August for acts intended to “perpetuate a fraud” – specifically, that it didn’t have the assets it said it did, nor the profitability. It’s now also being investigated by the Royal Canadian Mounted Police. Ernst & Young has been named in two class action lawsuits around Sino-Forest.

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