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A lump of Christmas coal for KPMG

It is a bad day for KPMG.Reuters reports that the Hong Kong High Courthas issued a contempt summons to 91 current and former KPMG partners for their failure to hand over audit working papers for US listed China Medical.China Medical is in liquidation and the court apparently has been overseeing the liquidation of Hong Kong subsidiaries. The case is a repeat of an earlier spat with EY over working papers for Standard Water, which was resolved when EY “found” the working papers on a server in Hong Kong.

KPMG says it cannot turn over the working papers without permission from mainland regulators.The US PCAOB reached an enforcement agreement with China that allowed it access to working papers in connection with investigations (but not inspections).Hong Kong has no such arrangements, and this is private litigation.

China has argued national sovereignty and state secrets concerns trump foreign laws requiring the production of documents on Chinese companies listed abroad or doing business abroad.Hong Kong, while part of China, is being treated the same as the United States, presumably to avoid undermining arguments used against the U.S.I seriously doubt there are any state secrets in these working papers.

Shinewing faces huge fine

Chinese regulators have fined leading Chinese CPA firm Shinewing a stunning 4.4 million yuan (US$667,000) for a failed audit of a Chinese listed company. I believe this is the largest fine ever assessed on a CPA firm in China, although many firms have received the death penalty in previous regulatory crackdowns. Earlier this year China's two of China's largest local firms (RSM affiliate Ruihua and BDO affiliate Lixin) faced short term practice bans.

Shinewing was the 9th largest Chinese CPA firm in 2015, the latest year for which CICPA data has been released. Shinewing developed from the former joint venture between Coopers & Lybrand and CITIC. It did not join PWC when PW merged with C&L. Shinewing has long held a reputation of being one of the high quality local CPA firms, although it has not gained the market share that its larger competitors obtained by aligning with second-tier networks like RSM and BDO.

It is a good thing that Chinese regulators are getting tough on CPA firms, since these firms play a vital role in the development of China's capital markets.

Copyright 2017 Paul L. Gillis all rights reserved