John Hempton of Bronte Capital has posted an inflammatory post (it is outside the Great Firewall) alleging that China is a massive kleptocracy and that the beneficiaries of the wave of stock frauds by Chinese companies listed in the U.S. include the children and family of CPC Central Committee members. He offers no evidence to back up these assertions yet says they are based on his personal experience.
He also claims personal experience of this assertion:
When given direct evidence of fraudulent accounts in the US filed by a large company with CPC family members as beneficiaries or management a big 4 audit firm will (possibly at the risk to their global franchise) sign the accounts knowing full well that they are fraudulent. The auditors (including and arguably especially the big four) are co-opted for the benefit of Chinese kleptocrats.
Those are strong accusations. If Hempton actually has personal experience and direct evidence of Big Four corruption as he says he does, he needs to turn that evidence over to the SEC and the PCAOB. It is simply unfair to investors and the Big Four firms if this issue is not run to ground.
Carson Block of Muddy Waters made similar assertions in a letter to the PCAOB in which he accused some Big Four partners of conspiring with clients to defraud investors.
I personally do not believe that any of the Big Four firms would do these things. There is always the possibility that a rogue partner could undermine the firm’s quality systems. If the fraud were later discovered the firm would be in a tough position. It will be tempting to early retire the partner and then try to sweep the problem under the rug. There have been persistent allegations this year by people in the investment community that that is exactly what has happened in at least one situation.
People have told me about their concerns that the pending localization of the Big Four will result in the impairment of the independence of auditors. Will the local partners be as willing as expatriate Big Four partners to stand up to political pressure? Hempton alleges that independence has already been impaired.
These allegations demand a response – from both Hempton and the Big Four firms. Hempton needs to put up his evidence, if not to the public, at least to the PCAOB and SEC. Maybe he has done that, and perhaps his allegations have led to some of the current (and likely continued and expanded) actions against the Big Four by the SEC. The Big Four firms need to aggressively push back on Hempton’s allegations. If they have a problem, they need to disinfect it with sunlight. As countercultural as it may be to them, they need to throw any rogue partners to the wolves.