While the world was stunned by Enron's bankruptcy and the role of Arthur Andersen LLP in the fiasco, Chinese investors face the reality that irregularities occur not only in China's fledging accounting business, but also among foreign accounting firms based on Chinese land.

"I used to support the authority's decision to use big international accounting firms rather than domestic ones," said Cai Guangqiang, a 52-year-old investor in Shanghai. "But in light of the Enron-Andersen scandal, I think we should look at this decision carefully. It's not correct to have blind faith in big shots from foreign accounting firms."

Cai suffered a great loss from an investment in Yinguangxia, a listed company whose share price plummeted last year after it was found involved in stock fraud.

Heated debate

Zhongtianqin, a Shenzhen-based accounting firm, was found to have helped Yinguangxia fabricate profit reports to win a top performer position. Zhongtianqin's license has since been rebuked by the central government -- the Ministry of Finance in Beijing.

More than 60 listed company clients of Zhongtianqin, which was previously the largest and most renowned accounting firm in China, have had their reputations damaged because of the accounting firms' fraudulent actions related with Yinguangxia.

This scandal combined with several other stock fraud incidents led China Securities Regulatory Commission (CSRC) to invite foreign accounting firms to audit listed companies.

Earlier last year, CSRC stipulated that listed financial companies needed to have their financial statements audited by one of the "Big 5" international accounting firms before disclosure. At the end of last year, the market watchdog went even further.

On December 31, CSRC released a provisional rule stating that, starting this year, public firms must use international accounting firms and make "supplementary" audit report before they issue new shares. The last decision sparked heated debate in the accounting community.

Cautious development

For the foreign players, especially the so-called "Big 5", it's a bitter-sweet new year gift.

The "Big 5" -- Andersen, Deloitte Touche Tohmatsu (DTT), PricewaterhouseCoopers, KPMG and Ernst & Young - have all set up joint ventures in China.

"There have been quite a few domestic enterprises contacting us, including listed companies. And I think the same is true of the four other accounting firms," said Christopher Lu, head of DTT's Shanghai unit.

He shows caution rather than enthusiasm.

"We make very deliberate evaluations before we accept a new client," he said.

The "Big 5" are strong in international expertise, but working with Chinese enterprises is quite a different story.

According to Lu, the difference poses more challenge and audit risk for international accountants.

When the Big Five came to China a decade ago, they only served their existing multinational clients operating in China. However, in the last few years, they have witnessed a sharp surge in business from Chinese enterprises, especially the large State-owned enterprises, overseas-listed companies and private ventures.

DTT's China revenue increased by more than 20 percent in the last two years and about 30 percent of the revenue comes from domestic firms.

Challenges lie ahead

His view is shared by Professor Li Ruoshan, dean of the Accounting Department at Fudan University, and his primary concern is the potential misuse of the new rule.

All foreign accounting firms have their local partners, which means it is possible that the first audit report and the supplementary report are issued by the same auditor as long as the firm has two identities.

He also pointed out that the new rule is not in line with the World Trade Organization's national treatment principal.

Domestic accountants show even great concern to the new provision, saying it is unfair to them.

"The policy excludes all domestic accounting firms where the majority are honest and law-biding," complained a senior official with a leading Shanghai accounting firm, who preferred not to be identified.

Li believes it is a transitional measure as authorities hope experienced foreign accountants can reduce the number of fake accounts and guarantee the credibility of companies.

(China Daily February 5, 2002)