Hard truth of accounting practice
Two sets of accounts
It’s unwise to invest in any financial instruments issued by Chinese entities (CCP-based companies) at all based on the widespread accounting fraud in China . Don’t forget the lesson of Guangdong International Trust and Investment Corporation bankruptcy caused by CCP. CCP government has defaulted on $1.6 trillion of century-old Chinese debt, including interest as reported by the Fox Business.
It’s always suggested not to invest in the financial instruments issued by CCP-based companies including shares, bonds, Certificates of Deposit and related derivatives. Shares traded in international capital markets typically include those issued by Alibaba, Baidu, Tencent and so on. Bonds include those issued by China Evergrande Group, China Vanke Co. Ltd, Times China Holdings Ltd, etc. Related derivatives include call options and put options based on shares of Alibaba, Baidu, etc.
There is a truth universally acknowledged in the accounting industry under CCP’s rule that it’s a prevailing practice that there’re two or more different sets of accounting books for companies including state-owned enterprises.One accounting book is that for external use subject to external audit but in fact useless(external account) and the other is for internal use not subject to external audit(internal accounts). Accountants carrying out due diligence for business buyers usually investigate internal accounts for helping buyer evaluate targets and read external account and tax returns just for assessing potential tax liability. An accounting fraud related to CCP’s One Belt One Road Project in Pakistan has been recently reported by THE DEPLOMAT.
Standards on Audit under CCP’s rule only partially adopt ISAs. However, they are seldom followed by auditors strictly in China. Many auditors prepared financial statements for clients disregarding objectivity and independence requirement established in the International Code of Ethics for Professional Accountants issued byThe International Ethics Standards Board for Accountants. They even made accounting estimate such as receivables impairment and consolidating schedules for clients that should be independently checked by auditors themselves. They sometime failed to audit the bank balance reconciliations, receivables reconciliations and inventory reconciliations. They often failed to audit revenue recognition based on the economic substance of transactions.
Although most CCP-based companies issuing financial instruments in international capital markets are audited by Big Four, namely Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, there’re many weaknesses and loopholes in Big Four’s audits as indicated by the UK Financial Reporting Council publications and by the US PCAOB publications. As reported by the Financial Times, big four were engaged in a series of misconduct cases in the UK.
Refuse international scrutiny
Moreover, the Public Company Accounting Oversight Board(PCAOB) has for years been unable to review audits of CCP-based companies because CCP prohibits PCAOB from inspecting auditing firms under its rule and bars sharing internal audit documents in the same way it rejects call for probe into origins of coronavirus pandemic. PCAOB is a nonprofit corporation established by American Congress through The Sarbanes-Oxley Act of 2002 to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports.
Hard truths of PESTEL analysis results
There’s a terrible political environment of dictatorship in China,which is ruled by police, by gangs, by cheating and by corruption and lack of free speech because of CCP. CCP recently sentenced four Canadians to death. A CCP spokesperson said Canada “knows the root cause” behind recent death sentences for Canadians facing drug charges, the latest escalation of conflict between two countries following the arrest of Huawei executive Meng Wanzhou, as reported by the Independent.
Most of the people in China are living in poor. There’s no workers protection, no property rights protection and a few wealth putting money in the West such as the US. The reports boasting about abundant of consumers in China are fake news.
Where there’s communism there would be no freedom of religion or no freedom of speech, there’s no faith. The common features of misinformation of coronavirus, fake news of vaccine and accounting fraud made by CCP are by means of cheating, punishing whistleblowing, rejecting international scrutiny and lack of faith. Because lack of faith, you can’t count on information transmitted by CCP faithfully represent what it purports to represent.
There are widespread intellectual property thefts and suppressing innovative thinking.
Environment has been destroyed due to economy great leap forward for many years resulting in pollution, overfishing and overbuilding leading to frequent sand storms and floods.
There’s no rule of law. As indicated above, there’s no severe consequence for falsification of documents made by financial institutions. There are no such strict punishment provisions in Chinese Company Law as in the UK Companies Act 2006 and other relative UK legislations about director’s responsibilities.
Isn’t there sweeping PESTEL change in Hong Kong following National Security Law enactment and revocation of special autonomy status? Are you sure your investment both in Hong Kong and in China mainland will not be reduced to nil or negative given that Hong Kongers are blooding every day because of your investment in tyranny?
Finally, it’s worthwhile to empathize that lack of faith, you can’t count on information transmitted by CCP faithfully represent what it purports to represent and you have to think twice before risking your dollars, euros or British pound sterling into the hands of CCP through bankers.
If you want to share the population benefit and achieve great return on investment in China, please join in the Whistleblower’s Movement to take down CCP to alter the PESTEL and eliminate accounting fraud first.
Author: CPA Jim
Brief introduction: A Certified Public Accountant (CPA) from China with plenty of experiences in inspecting audit working papers of auditing firms both for a CPA self-disciplining body and for audit firms in China.
(The above content only represents the author’s personal opinion)