Many media have reported financial performance of Sinopec, Ant group, Alibaba and other Chinese Communist Party Entities(CCP). Relevant reports are summarized as below.
The results reported in the statement of changes in equity of those companies as below.
It was found that there were several problems with the reports mentioned above.
Failing to emphasize the results unaudited.
When WSJ reported Jack Ma’s Ant Group Produces $3.5 Billion Profit in Six Months, it failed to add unaudited in the title and didn’t empathise that the half year results weren’t audited and helped inflate the share prices of Ant Group and Alibaba falsefully. SCMP also failed to emphasize that Alibaba’s 124 per cent gain in quarterly profit weren’t audited.
Ignoring difference between P/L and CI
Some reports used P/L to comment financial performance, while others used CI. It’s a basic knowledge that CI is completely different from P/L. In conformance with IFRS or China GAAP, CI is P/L plus OCI.
Abnormal foreign exchange rate
If CNY21.9 bn, CI of Ant Group for half year 2020, was translated to $3.5bn, the rate used by WSJ was CNY6.26 per USD. If CNY21.23bn was translated to $3.5bn, the rate used by WSJ was CNY6.07 per USD. The foreign currency exchange rate (XE) at 30 June 2020 was 1 USD = 7.07 CNY. The USD to CNY FER history summary page, detailing 270 days of USD CNY XE historical data from Wednesday 5/12/2019 to Saturday 29/08/2020, showed as follows that both 6.26 and 6.07 were unreasonable at all. There’s an overstatement calculation sheet as below.
|Item||Row No||XE at 30 Jun||Average||Highest||Lowest|
Scepticism was missing.
The media failed to notice such abnormal circumstances as below.
Firstly, unaudited half year 2020 result of Ant Group, either measured in CI or P/I, exceeded that of whole year 2019. CI of half year 2020 increased by 20% compared to the whole year 2019, while the whole world was trapped in the coronavirus trouble made by CCP and customers and businesses had to cut down on expenditures and tried all the measure to save money.
Secondly, Alibaba omitted section of OCI in the income statement for the Quarter Ended 30 Jun 2020. It could be inferred from the balance sheet that the OCI change was negative CNY0.3bn, that was a negative news for CCP’s Alibaba that must be covered up by these media and CCP.
Thirdly, the classification of loan receivables into financial assets measured at fair value through profit or loss to avoid potentially huge expected credit impairment loss charge by Ant Group was controversial given plenty of failed debts execution cases and abundant of collaterals selloffs via court execution in 2020 and severe macroeconomic situation after covid19 outbreak, its business and IFRS 9 requirement. The credit granted to customers of Ant Group was unsecured and there was severe unemployment situation in China as reported by Gnews both in English and in Chinese. ECL model considering this situation and other elements would significantly impact P/L and CI. The carrying amount of Loan receivables as of 30 June 2020 was CNY36.2bn.
It was provided in the Ant Group prospectus document that it focused on financial services and leveraged customer insights and domain expertise to consistently deliver products and services to solve customer needs. It was the first in China to make unsecured credit available to consumers and small businesses online at scale. The revenues growth of CreditTech business was affected by the technology service fee rate it charged partner financial institutions and the balance of consumer credit enabled through its platform. Its CreditTech solutions applied dynamic risk management solutions to transform consumer and SMB credit in China. Rising loan loss rates and deteriorating financial health of consumers and small businesses as a result of the COVID-19 pandemic affected the balance and performance of consumer and SMB credit enabled through its platform. Failure to manage the growth of CreditTech services effectively could materially and adversely affect its prospects. As a result, results of operation and prospects could be materially and adversely affected.
IFRS 9 Financial Instruments provides that “Unless paragraph 4.1.5 applies, an entity shall classify financal assets as subsequently measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss on the basis of both:(a) the entity’s business model for managing the financial assets and (b) the contractual cash flow characteristics of the financial asset”, “ A financial asset shall be measured at amortised cost if both of the following conditions are met: (a) the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and (b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding”, “An entity’s business model refers to how an entity manages its financial assets in order to generate cash flows. That is, the entity’s business model determines whether cash flows will result from collecting contractual cash flows, selling financial assets or both” and “Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding are consistent with a basic lending arrangement. In a basic lending arrangement, consideration for the time value of money and credit risk are typically the most significant elements of interest. However, in such an arrangement, interest can also include consideration for other basic lending risks and costs associated with holding the financial asset for a particular period of time. In addition, interest can include a profit margin that is consistent with a basic lending arrangement.” Impairment loss on financial assets carried at amortised cost was calculated using expected credit loss model (ECL).
The loan receivables’ fair value were measured using Level 2 input as shown on page I-142 of “NOTES TO THE HISTORICAL FINANCIAL INFORMATION”. Level 2 input fair values are measured based on valuation techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly. Unlisted equity investments included in financial investments measured at fair value through other comprehensive income were carried at fair value of CNY34.0bn as of 30 June 2020 using Level 3 input Significant Unobservable inputs.
The fair value arrived at using Level 2 and Level 3 inputs could be manipulated more easily. It was said that possible consequences of IFRS 9 included more income statement volatility as IFRS 9 raised the risk that more assets would have to be measured at fair value with changes in fair value recognized in profit and loss as they arose. ECL on financial assets measured at amortised cost was more straightforward.
Fourthly, the audit on financial statements embedded in the Ant Group IPO document for the year ended 2019, 2018 and 2017 was conducted by EY which also audited Wirecard. Wirecard was engaged in accounting fraud. There’re many scandals concerning EY as reported by FT.
Fifthly, there was lack of robust PCAOB audit scrutiny. Many media spread misinformation about audit cooperation progress on 26 August 2020. In fact, no progress was made at all in essence. According to report by Reuters, China say it has made concessions in proposing to let U.S. regulators to audit some of its most sensitive companies but would insist on redacting some information on national security grounds. Many people forgot that it is national security that hinders PCAOB inspection. There is an abstract of SEC’s statement, “China’s state security laws are invoked at times to limit U.S. regulators’ ability to oversee the financial reporting of U.S.-listed, China-based companies. In particular, Chinese laws governing the protection of state secrets and national security have been invoked to limit foreign access to China-based business books and records and audit work papers. As a result, for certain China-based companies listed on U.S. stock exchanges, the SEC and PCAOB have not had access to the books and records and audit work papers to an extent consistent with other jurisdictions both in scope and timing.”
No enforcement of law, order and integrity, no truths in the financial reports of CCP.
Finally, following freedom being extinguished by Chinese Communist Party police both in Hong Kong and China mainland, it’s hard for an independent accountant to question management of CCP in confidence. Even if the accountants had confidence, did question the management and formed audit working records, they are more likely to be disappeared. The National Security Law of Hong Kong will also bar PCAOB’s inspection on audit quality and accounts of Hong Kong entities listed in the US.
The media mentioned above forgot their independent reporters were revoked visa to China for reporting the truths in China independently. CCP expelled three WSJ reporters working in mainland China, including Josh Chin, its deputy bureau chief in Beijing and an American citizen; Chao Deng, also an American; and Philip Wen, an Australian citizen. Press credentials were not renewed for American journalists working for the WSJ, the Washington Post and NYT. A FT editor was barred from entering Hong Kong just one month after the city’s immigration authorities refused to renew his work visa without explanation. Secretary of State Mike Pompeo condemned CCP’s decision, saying in a statement: “Mature, responsible countries understand that a free press reports fact and expresses opinions.” In the speech Communist China and the Free World’s Future, he said there was an editorial in NYT by someone had a clear view that was antithetical to the American way of life. NYT ran it straight-up without comment, forwarding – although albeit in the opinion section, but propagating CCP propaganda.
What is Journalism
According to book The Elements of Journalism written by Bill Kovach and Tom Rosenstiel, here are 10 elements common to good journalism, drawn from the book. Journalism’s first obligation is to the truth. Its first loyalty is to citizens. Its essence is a discipline of verification. Its practitioners must maintain an independence from those they cover. It must serve as an independent monitor of power. It must provide a forum for public criticism and compromise. It must strive to keep the significant interesting and relevant. It must keep the news comprehensive and proportional. Citizens, too, have rights and responsibilities when it comes to the news.
Then how did these media apply Journalism?
Author: CPA Jim
(The above content only represents the author’s personal opinion)