Exodus of auditors from struggling Chinese property companies raises governance concerns

By Claire Jim

HONG KONG (Reuters) – Auditors of at least 14 Hong Kong-listed Chinese property companies withdrew this year, securities filings showed, raising governance concerns about indebted developers, several of whom have not not yet released long-standing financial results.

Embattled developers including Sunac China, Shimao Group and Kaisa Group are among those whose listeners have parted ways in recent months. In many cases, firms outside the big four accounting firms have been recruited to replace them.

The trend, which accelerated earlier this year, saw auditors, including the world’s biggest audit firms PricewaterhouseCoopers (PwC) and Deloitte, resign from their roles.

It comes as the real estate sector, which accounts for around a quarter of China’s economy, has been beset by multiple headwinds after regulators clamped down on excessive borrowing since mid-2020.

A string of indebted developers defaulted on their offshore bond payments from late last year, a growing number of homebuyers halted mortgage payments on stalled projects and pandemic restrictions continued to undermine demand.

Analysts and Hong Kong’s audit watchdog say the growing list of auditors leaving developers highlights transparency and governance issues, especially as many exits occurred just before the announcement of the results.

The audit watchdog in Hong Kong, where most of China’s top developers are listed, said in an open letter to members last week that it had growing concerns that audit quality could be jeopardized due to changes close to the earnings period.

S&P Global Ratings director Edward Chan said many of these developers are already struggling and the market is watching what new auditors may reveal in upcoming financial statements.

“Investors and creditors would like to know more about whether there are debts hidden in financial reports,” Chan said, adding that it could help them calculate their asset recovery rate.

Although the auditors gave no reason for their exit, the developers blamed this decision on factors such as the inability to reach agreements with their respective auditors to complete the auditing process.

Deloitte in Hong Kong declined to comment on the reasons for the termination of their audit mandates for some Chinese property developers. PwC did not respond to requests for comment from Reuters.

OPAQUE PRACTICES

S&P’s Chan, which pulled the ratings of many Chinese property developers this year citing insufficient disclosure, believes some auditors have pushed back against opaque practices in the real estate industry such as the use of off-balance sheet debt.

Shimao announced in late March – days before the 2021 financial reporting deadline – that it would appoint Zhonghui Anda CPA Ltd as its auditor, while in July Beijing-based Sunac changed its auditor to BDO Ltd. In both cases, PwC had resigned as auditor. Listener.

Both developers cited the inability to reach an agreement with PwC on the timeline for completing the audit procedures as the reason for the change, as they were unable to provide the required information to the auditor on time due to COVID-19 induced restrictions in China and other markets. The factors.

Shares of Hong Kong-listed Shimao and Sunac have been suspended since April due to the inability to release their financial results for the year 2021, and they risk being delisted if they remain suspended for 18 months.

Hong Kong’s audit watchdog, Accounting and Financial Reporting Council (AFRC), said in its letter last week that the majority of new appointments at companies with significant operations in mainland China or overseas concerned auditors who have “disproportionate” relevant experience and available resources.

“We have concerns about whether the incoming auditors had the necessary skills and adequate capabilities to perform quality audits in a limited time frame,” he said.

(Editing by Sumeet Chatterjee and Muralikumar Anantharaman)

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