American and Chinese corporations are not being properly audited, according to the accounting oversight board:
Auditors are not properly testing U.S. companies' internal accounting controls, the head of the main auditor watchdog said, while also reiterating urgent concerns about audit firm inspections in China.
Internal controls on books and records -- a requirement imposed on corporations by 2002's post-Enron Sarbanes-Oxley law to combat accounting fraud -- are not being properly tested by outside auditors, Public Company Accounting Oversight Board (PCAOB) Chairman James Doty said on Thursday.
"This is a very major issue for us," Doty told Reuters on the sidelines of a securities regulation conference. [...]
Touching on another key issue for his group and auditors, Doty said the PCAOB needs to gain entrance soon to China to inspect firms that audit U.S.-listed companies.
"We are not talking about something that should happen three years from now. It needs to happen now," he said.
After being rocked by a series of accounting scandals, Chinese regulators have placed the blame onto big auditing firms:
The unprecedented move, following a string of accounting scandals at U.S.-listed Chinese companies, could ratchet up tensions between U.S. and Chinese financial regulators.
It could also throw another wrench into Chinese expansion efforts by the Big Four auditors -- Deloitte, KPMG, PricewaterhouseCoopers and Ernst & Young -- which were already concerned about hits to their reputation from accounting problems at China-based companies.
"Everyone knew a day of reckoning would come later, and in this case the day of reckoning is now," said Lynn Turner, former U.S. Securities and Exchange Commission chief accountant.
However, China has its own accounting problems with government auditors missing the mark by three trillion yuan:
China’s local government debt may be almost 3 trillion yuan ($473 billion) higher than the figure given by the nation’s audit office, if loans taken out by township governments are included, the Economic Observer reported, citing research from an independent institute.
Borrowing by townships, an administrative tier of government below provinces, cities and counties, wasn’t included in a report by the National Audit Office in June that put debt from those three levels at 10.7 trillion yuan, the weekly newspaper said in a report on its website dated Nov. 12, citing Beijing Fost Economic Consulting Company.
Local authorities in China, barred from directly selling bonds or taking bank loans, set up at least 6,576 companies to raise money for roads, sewage plants and subways, according to the audit office’s report. Government officials have sought to allay concerns that the debt will saddle banks with soured loans and derail economic growth.
Many widely touted Chinese “construction starts” have been found to be little more than holes in the ground:
China’s success in starting construction on 10m units of affordable housing this year has been stripped of some lustre by an admission that a third of the projects are little more than holes dug in the ground.
The housing ministry has qualified a previous statement that China had hit its 2011 public housing target starts by October, saying “construction starts” had been loosely defined. The move confirms earlier government concerns that building work were proceeding too slowly.
For the global economy, the distinction between digging holes and actually building homes in China has rarely been so important, as the affordable housing programme is an important swing factor in commodities markets.
By underreporting commodity reserves such as copper, China's accounting tricks can distort global prices:
Justin Lennon, a metals analyst with Mitsui Bussan Commodities, said a market can appear to be in a deficit and a surplus simultaneously because economic forecasts only look at production and demand for the calendar year and exclude excess stocks carried over from the past.
"The (current) oversupply is a consequence of the economic conditions of the last three years, and current and future deficits will be strong enough to digest that oversupply," Mr. Lennon said.
But at least one million metric tons of that surplus "isn't available for sale, it has to be part of the ebb and flow of moving copper down the line to the ultimate end product, Mr. Lennon said. An additional 500,000 to 600,000 metric tons is in China's hands, "and they keep that as a rainy-day fund," he said.
Even so, the estimates of J.P. Morgan and BlackRock leave about one million tons of copper unaccounted for.
Neither company states who is hiding the extra copper, though BlackRock's latest amendment notes there are "unreported copper inventories held by the State Reserve Bureau in China and by other market participants in China."
A Chinese economist has described reported figures as so badly skewed that the regime is almost bankrupt:
Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.
Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.
Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.
Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in real estate development each year (accounting for up to 70 percent of GDP in 2010).