Shinewing faces huge fine | China Accounting Blog | Paul Gillis

Shinewing faces huge fine

Chinese regulators have fined leading Chinese CPA firm Shinewing a stunning 4.4 million yuan (US$667,000) for a failed audit of a Chinese listed company. I believe this is the largest fine ever assessed on a CPA firm in China, although many firms have received the death penalty in previous regulatory crackdowns. Earlier this year China's two of China's largest local firms (RSM affiliate Ruihua and BDO affiliate Lixin) faced short term practice bans.

Shinewing was the 9th largest Chinese CPA firm in 2015, the latest year for which CICPA data has been released. Shinewing developed from the former joint venture between Coopers & Lybrand and CITIC. It did not join PWC when PW merged with C&L. Shinewing has long held a reputation of being one of the high quality local CPA firms, although it has not gained the market share that its larger competitors obtained by aligning with second-tier networks like RSM and BDO.

It is a good thing that Chinese regulators are getting tough on CPA firms, since these firms play a vital role in the development of China's capital markets.

The Shinewing fine exceeds the fine (US$500k) paid by each of the Chinese member firms of the Big Four to the U.S. SEC for failing to turn over audit workpapers to the SEC.

It is significant that Chinese regulators have not assessed any major penalties against the Big Four in China. The Big Four firms would likely argue that their quality control is higher, but I think that the main reason is the client base. There are about 5,000 companies listed on the major Chinese exchanges, and the Big Four audit only 374. A sizable portion of the Big Four audits are dual listed companies (H-shares in Hong Kong and NYSE listings) The Big Four has about 90% of the dual listed market which includes major state-owned enterprises like the Bank of China and Sinopec. I think it is highly unlikely regulators will find any problems with the accounts of large SOEs, so the Big Four are less likely to be cited by regulators than a large local firm auditing a thousand smaller publicly listed companies. I expect there will be political pressure on regulators to bring a case against a Big Four firm just to even the playing field.

The tough actions by Chinese regulators make a mockery of the pathetic regulation in Hong Kong. I have pointed out many times that Hong Kong is soft on auditors, with insignificant fines for serious offences. I believe that is because the Hong Kong CPA profession is self-regulated. Legislation has been promised this year to transfer audit regulation of public companies to the Financial Reporting Council to bring Hong Kong in line with global practice. But there are not many days left in this year.

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