Chinese Developers’ Accounts Under Scrutiny as More Auditors Resign

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Audit firms are probably taking a hard look at the developers’ results after a series of revelations about off-balance-sheet debts, analysts and investors say

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In recent days, PricewaterhouseCoopers has quit as auditor at three developers, Ronshine China Holdings Ltd.

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Powerlong Real Estate Holdings Ltd.

and Shimao Group Holdings Ltd.

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and at two linked property-management companies, Ronshine Service Holding Co.

and Powerlong Commercial Management Holdings Ltd.

according to stock-exchange filings made by the companies.

PwC in Hong Kong, a member of the global accounting network of the same name, is responsible for signing off on these financial statements because the companies are listed in the city.

PwC quit its audit role at another company, Hopson Development Holdings Ltd.

, in January. Firms that are members of other international accounting networks such as BDO, Deloitte and EY have also resigned from property-company audits in recent months, the developers said in exchange filings.

A string of other companies, including China Evergrande Group,

haven’t parted with their auditors but have warned they won’t be able to publish audited results by a March 31 deadline. Several of these companies, including Evergrande, Guangzhou R&F Properties Co.

and Sunac China Holdings Ltd.

, are audited by PwC. Hong Kong’s stock exchange may allow shares in some to continue trading, if they can publish unaudited figures.

The recent resignations and warnings of delays in financial reporting are indicators that “the auditors are now taking their jobs a lot more seriously than they may have in the past,” said Michel Lowy, the chief executive of SC Lowy, a financial institution specializing in distressed and high-yield debt. “The quality of disclosures has been historically very poor,” he said.

The stakes have risen as hidden debts have surfaced at companies such as Kaisa Group Holdings Ltd.

and Evergrande, sometimes via previously undisclosed guarantees for privately issued debt or wealth-management products. Evergrande’s property-management subsidiary said recently that banks had taken control of more than $2.1 billion of bank deposits it had pledged to guarantee third-party borrowings.

The disclosures have surprised investors and credit-rating companies. That has worsened already dire investor sentiment, which has pushed many bond prices to levels that imply investors have little hope of being repaid in full.

PwC in Hong Kong declined to comment. Hong Kong-based spokespeople for Deloitte, EY and KPMG didn’t respond to requests for comment.

PwC’s recent resignations came after it demanded more information from the companies and said it couldn’t provide a time frame for completing audits, the companies’ filings showed.

For the developers Ronshine and Powerlong, the queries related to the pledging of bank deposits, while for Shimao, they covered trust-loan arrangements involving joint ventures and associated companies. At both Hopson and Shimao, the two sides also couldn’t agree on an audit fee.

In October, Hong Kong’s Financial Reporting Council said it had questions about the adequacy of “going-concern” reporting by Evergrande and would investigate PwC’s audit of Evergrande’s 2020 financial results.

It is very unusual for auditors to resign so soon before annual results are due, said Nigel Stevenson, an analyst at Hong Kong-based accounting research firm GMT Research. When replacements step in, they should be able to access the information provided to their predecessors, but their teams would be starting from scratch with an unfamiliar company, he said.

Ronshine and Powerlong have both hired Hong Kong-based Elite Partners CPA Ltd., while Shimao engaged Zhonghui Anda CPA Ltd., according to filings by the three developers.

Given the sector’s financial distress, audit firms will be mindful of potential future legal risks, which could in turn prompt them to take a more stringent approach to clients, market-watchers say.

Mr. Lowy said there were precedents for auditors being sued as part of an attempt to recoup some value for creditors. This is sometimes done by liquidators following a corporate collapse.

In 2009, Ernst & Young in Hong Kong paid an undisclosed sum to settle a case brought by the liquidators of Akai Holdings, a consumer-electronics company that had collapsed in 2000, and whose accounts it had audited in earlier years.

To defend against such a lawsuit, auditors would have to prove they had done enough due diligence in the auditing process, said Kevin Chen, a chair professor at the Hong Kong University of Science and Technology.

Write to Rebecca Feng at [email protected]

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Credit: www.Businesshala.com /

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