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KPMG in deep trouble in HK

Matt Miller of Reuters has an interesting update on the troubles KPMG is having in Hong Kong with a failed US listed Chinese company. In my view the problems are of its own making. 

KPMG Hong Kong was the auditor of China Medical Technologies Inc., which failed after management was charged by the US Securities and Exchange Commission with looting over $400 million from the company. The company was put into liquidation in 2012 in the Cayman Islands, where it was incorporated.  

Actually, KPMG Hong Kong was not the auditor, and that is the problem.

Several years ago I wrote about KPMG’s labeling problem where they had a practice of using Hong Kong letterhead to sign audit opinions on audits done by KPMG Huazhen, KPMG’s China affiliate. To me, this was like a Wenzhou shirt maker sewing a made in Italy tag on a shirt made in China.   

KPMG Hong Kong issued the audit report, yet when liquidators asked to see their working papers they said they did not have them since the actual audit was done by KPMG Huazhen, its mainland affiliate which was prohibited under Chinese law from sharing them. Auditing standards require that the principal auditor sign the audit report. Only the principal auditor can sign the report. It appears that KPMG Huazhen was the principal auditor of China Medical and should have signed this audit report. Had they done it right, this case would never have ended up in a Hong Kong court. 

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