Paul Gillis
Paul Gillis

Overseas operations of state-owned companies have been identified as “hotbeds of corruption”, who are seldom audited, writes accounting professor Paul Gillis on his weblog. The State Council has now put out a bit for overseas auditors to clean up the mess.

Paul Gillis:

The large state owned firms are said to have assets of more than 4.3 trillion yuan (US$690 billion) located outside of China. Some of these firms (like PetroChina) are publicly listed in China and overseas markets, and are already audited by independent firms, but the amount of audit work done on overseas operations would depend on materiality. Stand alone audits of overseas operations are likely to be more detailed.

It is interesting that China has chosen to use independent auditors for this work instead of government auditors. I expect that is because the work will be mostly done overseas, and independent CPA firms have better capabilities to work outside of China through affiliates in those countries.

While the Big Four may win some of this work, I expect the big winners will be the local Chinese CPA firms that have international affiliations, especially including the local member firms of BDO, RSM/Crowe Horwath and Grant Thornton. I expect that these firms will move aggressively to win this work, in part because winning now will position the firms to win the overall audits when the companies next rotate external auditors in 2020.

I don’t expect that this work is going to be easy, especially if Dong (Dasheng, former deputy auditor general at China’s National Audit Office (China’s GAO)) is correct in his assessment that the overseas operations are a hotbed of corruption. In fact, the work may be downright dangerous – perhaps another reason why the state decided to use external auditors.  This may be a real test of the independence of China’s independent audit firms. I hope they are up to the task.

More in the ChinaAccountingBlog.

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