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Canada warns on Chinese audit problems

February 29, 2012

Downtown Shanghai in haze. REUTERS/Carlos Barria

Having stirred up controversy in the United States, audit practices at China-based companies now are testing the patience of Canadian regulators.

In a special report, Canada’s audit regulator has come down hard on the quality of audits of Canadian-listed companies with operations in China, while voicing frustration at problems in getting documents.

“In too many instances auditors did not properly apply procedures that would be considered fundamental in Canada,” the Canadian Public Accountability Board said in its report last week.

Last year, amid accusations of fraud, market capitalization was decimated at Sino-Forest, a Canadian-listed company based in China.

The CPAB did not mention Sino-Forest in its report, nor did it name any of the China-based companies where it found problems. The agency said it looked at 24 “higher-risk” audits, 12 of them by national firms and 12 by regional or local firms.

Problems at one company were severe enough that a restatement will be required, and in seven instances, more audit work will have to be done, the CPAB said.

The report echoes problems that challenged U.S. regulators much of last year: subpar audits at a host of companies based in China and hurdles in getting evidence because of China’s state secrets laws.

As in the United States, the CPAB’s report highlights a blind spot in securities laws: companies in China can list on North American exchanges, but regulators have no way of reviewing the audit work that was done for them in China.

U.S. regulators still are trying to get their hands on documents to help them investigate possible fraud at Longtop Financial, a Chinese company under investigation by the Securities and Exchange Commission.

The CPAB said it has asked the leadership of audit firms to find a solution to the problem of getting work papers, warning that lack of access was “unacceptable.”

Canada is not limiting its scrutiny to China. The CPAB said it is looking at audits of Canadian-listed companies in other parts of the world and will be coming out with more reports later this year.

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