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Accounting scandals in listed firms from China create ripples in US, Korea and Taiwan
By LYNETTE KHOO
27 June 2011
Chinese companies - and their accounting scandals - are giving regulators worldwide sleepless nights.
A full-scale investigation is underway in the United States while several other stock exchanges are thinking of ways to ensure that the financial accounts of Chinese companies are kosher.
Korean Stock Exchange (KRX) said ‘it is now considering some rule changes to improve investor protection and ensure reliability of the financial statements of foreign companies’.
Details of these measures are not firmed up yet, a KRX spokesman told BT.
To ensure the quality of audit, KRX listing rules currently have certain criteria for auditors of foreign companies applying for listing on KRX. These requirements would mean that these companies have to engage Big Four accounting firms for primary listings or Big 30 for secondary listings, the KRX spokesman said.
In the US, Nasdaq and NYSE Euronext have halted trading in the shares of at least 21 small- and micro- cap Chinese companies in the past year, while the Securities and Exchange Commission (SEC) is investigating these companies, their auditors and sponsors that marketed them to investors.
Following the spectacular collapse of shares in Toronto-listed Sino-Forest amid accusations by short-seller Muddy Waters that it overstated its assets, SEC head Mary Schapiro said last week that the SEC is exploring ways to address investor concerns about shoddy accounting that has caused numerous Chinese companies to restate earnings.
Taiwan Stock Exchange (TWSE), a hot venue for dual listings among S-chips (Singapore-listed Chinese firms), said secondary listings are still required to meet stringent standards though they are already regulated in their primary market.
‘We have very strict profitability requirements for companies and each company must also have its figures certified by two Taiwan CPAs (certified public accountants),’ its spokesman said.
TWSE also requires listed companies to have a diversified board with no fewer than two independent directors, with at least one independent director residing in Taiwan.
Hong Kong’s stock exchange was approached last week for comment but did not get back to BT by press time last night. It has earlier drawn flak for its decision last December to allow mainland companies listed in Hong Kong to use Chinese accounting standards and auditors approved by mainland regulators.
But it said that regulatory authorities in Hong Kong and the mainland have set up a cooperation mechanism for Hong Kong for investigating and regulating CPA firms, with mainland regulators undertaking the actual probes.
In a bid to boost their valuations, many S-chips have flocked to Hong Kong and Taiwan for secondary listings while a handful like Combine Will and Foreland Fabrictech are heading for Korea instead. The volatile market conditions and mixed performance of dual listings have, however, caused some to postpone their plans.
While none of the S-chips dual-listed in Taiwan and Hong Kong has got into trouble, China Gaoxian - which dual-listed in Korea only in January - is among the few S-chips found to have had accounting irregularities this year.
SGX has since taken steps to strengthen safeguards in the S-chips cluster. It has asked S-chips to engage professionals to determine whether their internal controls are sufficient and to ensure they have the power to remove rogue legal representatives at their Chinese subsidiaries.
Stories of how some companies managed to fool their auditors with false bank statements with the help of bank branch officers have got investors worried about a potential systemic risk in the accounting integrity of Chinese companies. But some market watchers read it differently.
Lin Song, partner of China practice at RHT Law LLP, said it would be unfair to tar all Chinese companies with the same brush, although the significant number of accounting scandals suggest a high risk in China that companies may collude with local bank branches.
‘Companies in China are still generally more focused on growth than corporate governance,’ he said. While there are laws in China against commercial crimes and fraud, enforcement is still not up to scratch - as local governments tend to protect local businesses.
China issued internal control guidelines in April last year requiring Chinese companies listed both onshore and offshore to implement them from this year, and companies listed on the mainboards of Shanghai and Shenzhen to do so from 2012.
But Ms Wu noted that it is not mandatory for the offshore listed companies to adopt the guidelines. And even if a company intends to adopt the guidelines in order to improve its internal controls, it takes time for the implementation to take effect.
Stock exchanges and overseas regulators could, however, require unified accounting standards in companies operating in different jurisdictions and ensure audit quality, she said.