Conducting business in China has never been a straightforward proposition no matter if you are an SME or a multi-national or one of the world’s largest audit companies.

At the end of January, the US courts ruled that the Big Four affiliates in China were banned from operating for six months. The judge’s ruling is quite an eye opener on Private Equity and Capital market transactions in China, most especially the reliability of the Big Four auditing accuracy!

Transactions in this market worth billions of dollars rely on the audits providing data that reflects the companies involved and their trading positions. This is now very much in question.

The Big Four are appealing the decision and whilst under review they are allowed to continue operating in China. The Securities and Exchange Commission had requested data on some Chinese companies quoted in the US but the Big Four had refused on a number of occasions over the last two years stating that it would breach Chinese state secrecy laws.

The growth of KPMG China and Ernst & Young China has been unprecedented but PWC underwent the largest growth with staff numbers increasing four fold to 8,000 people between 2004 and 2012.

In the judge’s lengthy ruling he stated: “A good faith effort to obey the law means a good faith effort to obey all law, not just the law that one wishes to follow”

One of the breaches in compliance has been the Sarbanes-Oxley regulations which have in fact helped the auditors’ bottom line in the US as it has increased the necessity for stricter compliance of clients which has resulted in an increase in the fees of the Big Four.

If the ban is upheld then companies such as P&G, Amazon and Nike may have to look for new auditors in China as they have large revenue bases there. Conducting business has never been straightforward but if the appeal is not successful then a large gap will be left in the market that would need to be filled by Chinese audit companies.

With such potential impact on the market and conducting business in China, it is quite amazing that this has not been reported more aggressively.

Paul Errington is chief executive of Connaught Finance Investments, Hong Kong. * Office: +852 3796 7029 * Mobile: +852 6732 2505 paul@connaughtfinance.com; www.connaughtfinance.com

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