“京交会”会计服务分论坛一嘉宾发言稿（一）
CAPA成员代表James Lee（中英文）

CROSS BORDER AUDIT QUALITY

Ladies and Gentlemen,

Thank you to CICPA

ICAEW has 138,000 members in 160 countries around the world. It’s a world leader in accountancy and finance, and our members work in practice and in business. So Audit is very relevant to our members.  

I’m talking today about cross border audit quality, and the challenges and opportunities it presents.

And my talk today was sparked by a particular concern.

As this audience will know, in the US the number of  law suits brought against Chinese companies listed in the US has escalated over the past few years from one  in 2009 to 39 in 2011, around 1/3 of all securities law suits.

I want to talk today a bit about these cases and the US’s reaction and then go on to talk about, from an ICAEW perspective, what this may mean and, from our experience, what can perhaps be done about it.

Allegations of fraud are always an uncomfortable subject, but fraud has been around since people began buying and selling goods to one another.

The case that you’re probably most familiar with is Shanghai-based Deloitte Touche Tohmatsu CPA Ltd which resigned from auditing Longtop Financial Technologies Limited last year. I understand the US SEC is pursuing Deloitte for failing to produce documents relating to Longtop..

Two more examples are China MediaExpress Holdings Inc[1] , and  Sino-Forest Corp,[2].

The question is why have so many come at once?

This focus on Chinese companies is having rather unwelcome consequences,

-          both for Chinese companies’ stock prices  - late last year some 58 Chinese companies faced de-listing in the US because their share prices and market cap had fallen significantly, and investors were betting against them (shorting)[3]; -  

-          and for Chinese companies wishing to list in the US, and their auditors, which might now be facing rather stringent regulation.

One reaction in the US has been to start cracking down so-called reverse mergers[4], through which many Chinese companies have entered the US listings market. In June last year the U.S. Securities and Exchange Commission told investors that reverse merger companies may carry an increased risk of “fraud and other abuses,” and have been tightening up the listing standards for companies that use them to go public[5]. And in January this year the FBI raided the offices of  New York Global Group, a company which arranges reverse mergers for Chinese companies

The PCAOB (Public Company Accounting Oversight Board) is looking at inspecting audit firms of Chinese issuers of U.S. securities or banning uninspected Chinese audit firms from working for U.S. registrants. 

 And is looking to reach a pact with the China Securities Regulatory Commission to allow for joint inspections of Chinese audit firms as soon as the end of 2012

The recent spate of bad news stories is pretty bad publicity for Chinese companies. Not all of them relate to reverse mergers.

For example the free internet security software company, Qihoo 360, which was shorted after a negative research report by Citron Research And it’s interesting seeing how the company dealt with it with a positive campaign of information[6]. At the moment the stock seems to be climbing back up again[7].

Of course it’s clear from experience around the world that when there is one Accounting scandal, others usually follow.

Enron was a classic case in kind.

The ‘wave’ effect that followed Enron – as dozens of companies were charged with accounting fraud -  seemed to be because the spotlight was suddenly on the profession, and therefore things that would have gone unobserved come to light. Something perhaps that no regulator was aware of before. So regulators, journalists, and industry insiders start to put in more time on risk management and on checking.

So we may just be seeing that kind of ‘wave’ of Chinese companies. 

Of course, such cases may simply expose misunderstanding between two countries, with different rules around audit and accounting, and perhaps different understandings of how to interpret standards.

If that’s the case, perhaps it’s quite a timely wake-up-call.  

After all, vigilance and transparency are critical for the Accounting profession and for good audits.  Ignorance of the law is no excuse. So any company seeking to list overseas must get advice on exactly what rules it is committing itself to. And rules in the US around listing are pretty complex.

I think CICPA has commented that when Chinese companies enter the American market through reverse takeovers, partly because they are dealt with by small firms, they don’t always get the financial advice they need. Perhaps that’s an argument for greater convergence between the US and China over accounting rules.

I think it’s also fair to say that the Audit profession in China is young – less than 30 years old, and that it is developing and learning all the time. Cross border audits do throw up some difficult issues. The more experienced the accounting professionals are, the less likely they are to make mistakes. Continuing to raise knowledge of international business and standards is therefore key.

And learning goes two ways. Foreign investors in China will be unfamiliar with some issues in China (mainly lack of disclosure) such as

-          lack of independent verification of titles with relevant authorities

-          asset titles given to banks as collateral for private loans to related parties without proper disclosure

-          off balance sheet transactions (e.g. Put options)

-          use of funds from capital raising for purposes not disclosed on listing

Market perception is important for China, of course, but ultimately the best way to improve market perception is probably to invest in improving the governance of companies and transparent financial reporting.

This approach might help stop investors ‘shorting’ your company.

After all, if investors have all the information to hand, they (and other investors) will see that your stock is worthwhile.

And I say that from experience.

Audit is a necessary plank in good financial management and corporate governance.

 Auditors and their regulators in the UK and EU US have also faced fairly stiff criticism over the past few years, particularly after the banking crisis in the UK.

There’s legislation on its way in the UK and EU on Audit, which will change how practices operate in Europe. And also affect the regulation of the profession, in particular the role of the Big 4

For the UK profession, it’s been an opportunity to take a self-critical look at ourselves.

ICAEW has done a lot of work on improving audit quality, and our work in this area actually started back in

2002, just as our last boom was starting - and I’d like to share some of this with you.

In 2002, we worked with British Government on creating an Audit Quality Forum

Our Publications include the highly-regarded one on International Consistency issued in October 2010[8]

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The paper looks at how the IAASB standards are applied internationally and expose some limitations in the standards themselves, the way that auditors and audited entities work together and the ability of auditors to identify and address risks of material misstatement.

This paper recognises that achieving audit quality in any national environment is challenging and that no country’s culture guarantees either success or failure.”

It identifies five features of national environments that affect audited financial statements:

• political, economic and business environment;

• legal framework;

• education;

• culture; and

• perceptions of audit.

This paper suggests practical solutions to help deal with these challenges. Four areas for action that auditors, business, investors, standard-setters, regulators and governments and other organisations might take around the world. And here they are:

1)  Share experience to help to develop a consistent vision of audit quality, including providing greater opportunities for international secondments, exchange and education programmes and discussion forums..

2)  Acknowledge national differences within international standards. This means that standards would both: place more emphasis on how national differences (eg, as reflected in country indices) affect audit risk; and support auditors in exercising professional judgement to address misstatement risks in ways that suit the national environment in which those risks arise.

3)  Promote the role of audit in economic development.

4) Support research into national differences in audit.

One example of ICAEW working to promote cross-border audit quality is in issuing a set of online training videos examining professional scepticism and other key audit issues.

Featuring short talks by one of our regulators, the Professional Oversight Board chairman John Kellas, based upon audit inspection findings, as well as by ICAEW audit experts, the videos are intended to help with training and reinforce best practice.

 The videos are free to look at and can be found on our website (http://www.icaew.com/en/technical/audit-and-assurance/professional-scepticism.)

We have a busy Audit and Assurance Faculty which produces publications and technical guidance for example on ISA implementation, quality control, related parties and group audits

In 2010 we published a very well regarded report called Audit of Banks: Lessons from the Crisis, which examines the key issues and where there was room for improvement[9].

The recommendations that came out are many, but let me pick out the main ones:

-          In financial reports for banks, risk information should be presented in one place, perhaps through audited summary risk statements

-          There should be a guide to good practice in audit committee reporting.

-          Banks should confirm that key areas of judgement discussed with auditors are set out in the critical accounting estimates and judgements disclosures in the financial statements.

-          Auditors should also have more involvement in reporting on the front sections of annual reports.

-          And finally, there needs to be better and more frequent dialogue between auditors and bank supervisors

And our most recent report, last week, is on Enhancing the Dialogue Between Bank Auditors and Audit Committees.

-          It looks at striking an appropriate balance between cooperation and challenge, ensuring that issues are discussed fully

-          It also discusses the critical importance of publishing any challenges by the auditors and their resolution – in other words producing evidence that professional scepticism was used

-          and recommends using clear language that anyone can understand when reporting the results of an audit[10].

Of course, Cross border quality initiatives, originally kick-started by Sarbanes Oxley, have been taken forward and developed by many countries around the world.

The EC has developed the process of monitoring in its Statutory Audit Directive 2006 requiring monitoring regimes across all countries in the EU. The recent EC Transposition Report (February 2012) confirms the success of that approach - though the draft proposals on auditing now seek to strengthen that oversight further.

Oversight bodies have started to recognise each other across the world and the EC in its Transposition Report noted that Australia, Canada, China, Croatia, Japan, Singapore, South Africa, South Korea, Switzerland and the United States of America exercise oversight controls and monitoring equivalent to those applying in the EU, whilst a further 20 countries are in the process of developing such regimes that are likely to match the investor protection requirements of the EC.

This cross-border cooperation is ensuring a consistent oversight and monitoring programme is helping to raise audit quality standards around the globe.

This kind of cross-border cooperation will I think be key to improving audit quality, along with an emphasis on training and best practice within the countries involved.

Conclusion

I’ve given you a quick overview of some of the issues in the UK and how we have dealt with audit quality and some challenges to the European audit profession.

I think it’s worth reflecting that the audit profession in China is very young, and that the process of listing in other countries is fairly new. I am sure that the challenges in the market that we are seeing now – in both our countries – can and will be overcome.

In the UK, we believe that transparency and working closely with regulators is the key to market confidence.

Of course, investors are still flocking to China in large numbers, and the economic growth rate here speaks for itself!

Thank you.  

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