In order to counter systematic delay’s impact on financial decisions, cease CCP fraud, stop repeated CCP debts default and widespread forced labour, divest CCP enterprises please.
Author：CPA Jim from Himalaya Washington DC
(Picture source: Corporate Finance Institute)
There are many entities that failed to publish auditor’s report timely for the financial statements as of 31 December 2020 or for financial year 2020 (FY2020) in People’s Republic of China (PRC). They include top central financial enterprises, local enterprises and others that issue securities publicly, most of which are owned or controlled by Chinese Communist party directly or indirectly.
Take The Export-Import Bank of China (EIBC), which issues bonds in the PRC Interbank Bond Market (CIBM), as an example. Its auditor’s report for FY2019 was issued on 30 November 2020 while the deadline set by PRC for bond issuance is 30 April for each year for financial enterprise bond in the Article 32 of Guide for Financial Bond Issuer and for non-financial enterprise bond issuance in the Article 8 of Disclosure Rules of National Association of Financial Market Institutional Investors . Its auditor’s report for FY2020 issued on 10 May 2021 was late again. It has often delayed publishing auditor’s report.
(Picture source: snipped from www.chinabond.com.cn)
The same happened to other two policy banks i.e., China Development Bank (CDB) and Agricultural Development Bank of China (ADBC). The auditor’s report for FY2019 of CDB and ADBC were published on 12 January 2021 and 15 October 2020 respectively, FY2020 being late again.
(Picture source: snipped from PRCbond net)
The same also occurred to other banks, non-bank financial institutions and other CCP -owned entities.
(Picture source: snipped from PRCmoney net)
The audited financial statements are expected to inform investors. How could financial statements so late be expected to inform decision makers? How could investors make informed decisions to allocate its resources efficiently?
According to personal practices in PRC, the reasons of delaying publication of auditor’s reports can be summarised as follows.
First, going concern problems. Management of CCP entities always argued that they were CCP-owned significant uncertainty of going concern indications of other entities couldn’t be applied to and didn’t make detailed supporting documents to the argument. The internal audit quality reviewer of auditors would not give in to such baseless claim and would not agree on issuing audit opinion without going concern paragraph or unmodified opinions, depending on circumstances.
Due to being CCP-owned, their future is determined by CCP’s uncertain willingness. However, if they experienced financial trouble, that alone could indicate that CCP didn’t have sufficient willingness to support them and they couldn’t produce sufficient operating cashflow and comprehensive income resulting in negative equity, negative net operation cash flow for a long time.
Sometimes, to cover up net negative equity, CCP transfers investments in one entity to another one at the value established by CCP considering valuation report and auditor’s report. The valuation report is usually drafted by an intern employee just graduating from university by copying audit working papers from auditors subject to little amendment before signoff while the auditors are also not professional enough and fail to carry out sufficient audit work, such as assessing impairment testing on non-current assets, inventories, receivables or other current assets.
Second, bureaucracy problem in CCP enterprises management. Usually, auditors have informed them of what documents are needed and what work must have been accomplished before commencement of field work ahead of time. But more often than not, the consolidated financial statements including financial statement notes haven’t been prepared and presented by themselves. Going concern assessment hasn’t been made. Sometimes, they reject document request on reasons of secrecy or state security waiting for leaders’ approval, in fact just to cover up fraud such as related party transactions under unfair terms and conditions.
Third, non-payment of audit service fees. Some enterprises are in huge debt trouble or they regret agreement of adjustment proposals made on financial statements so that they don’t pay audit fees. Non performance of audit fee debt will usually lead to no signoff or no rubber stamp on audit reports or no delivery of signed audit reports.
Usually, it takes a long time for the leaders of auditors and CCP enterprises to negotiate three problems mentioned above. To solve such troubles, CCP now requires auditors to have CCP cell units so that grade system could overcome such issues. CCP grade system undoubtedly will only make auditor’s report more useless.
Fourth, forced labour backlashes. Forced labour occurred to employees of auditors. Employees of auditors have to work overtime to struggle to help client satisfy deadline 30 April to submit annual report and deadline 31 May to file annual enterprise income tax return. The PRC financial year and taxable year are uniformed by CCP to begin from 1 January to 31 December and accountants’ time are heavily occupied.
Their salaries are also very low, excluding those of managers or leaders. Their salaries are keeping unchanged despite skyrocketing home prices. As a result, dissatisfaction may break out in the form of sudden leaving work without any handover of work or high turnover that reduces quality of audit and delay auditor’s report.
Now tang ping is being applied to counter forced labour in PRC by Chinese youths. It means “Lying flat is my wise movement“, “Only by lying down can humans become the measure of all things.” The idea behind “tang ping” is not overworking, being content with more attainable achievements and allowing time to unwind. It’s a spiritual movement.
In order to counter systematic delay’s impact on financial decisions, cease CCP fraud, stop repeated CCP debts default and widespread forced labour, divest CCP enterprises please i.e., tang ping.
(This article only represents the author’s own views)