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China audit market update

I am back from a great summer in California and will be paying more attention to my neglected blog.  

For the past several years I have been reporting on changes in the rankings of leading accounting firms in China (2011, 2012, 2013) based on the CICPA’s annual rankings.  The data is incomplete, since it only includes the audit firms, not the consulting practices run by most of the firms in separate entities.

The 2014 rankings are out. The Top 7 remain in the same position, with some shuffling below. UHY Vocation replaced Daxin in the Top 10.  

EY grew at almost 20%, putting it within a pencil’s reach of BDO which had earlier displaced EY from the Top Four in China. #6 KPMG had a horrible no-growth year, probably because it was the big loser in mandatory audit rotation. 

Overall the accounting market in China for the Top 100 firms grew at 13%, with the Big Four growing at 10% and local firms growing at 15%. All of those growth rates exceed GDP growth, indicating that accounting is playing a more significant role in China’s economy. 

Why do auditors disclaim?

Last week Tianhe Chemicals (Tianhe), a Chinese company listed in Hong Kong, announced that its auditor, Deloitte, was planning to disclaim an opinion on its financial statements. Tianhe was the target of an activist short seller campaign by Anonymous Analytics last September and a damaging analysis by the Associated Press in November. Also last week Sihuan Pharmaceuticals (Sihuan) published its annual report for 2014 including a disclaimer opinion on its financial statements by auditor PwC. PwC used seven pages to explain why it was unable to express an opinion on the financial statements. Both stocks remain suspended

Disclaimer opinions are rare, so two in one week is notable. These opinions are rare because they are useless to companies and investors, so companies generally will not accept them. Regulators and exchanges are unlikely to accept a disclaimer opinion, which explains why these stocks are suspended and are likely to remain so.

There are four types of audit opinions. A clean opinion (also called an unqualified opinion) means that the auditor believes that the statements follow GAAP and are free from material error. Unqualified opinions are the most common audit opinions.  The terminology can be confusing to the layman. I had several clients in my career demand a qualified opinion since they certainly did not want an unqualified one, and it took some effort to explain that unqualified is better than qualified.  

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