HONG KONG—Accountants have withdrawn from a number of Chinese real estate companies, reflecting the challenge of reviewing the financial health of those companies after a punishing industry-wide downturn.
After a series of revelations about off-balance sheet debt, accounting firms are likely to take a close look at developers’ results, analysts and investors say. Pandemic-related restrictions in mainland China and Hong Kong have also made it difficult to gather information.
In recent days, PricewaterhouseCoopers has resigned as auditors from three developers, Ronshine China Holdings GmbH.
Powerlong property ownership GmbH.
and Shimao Group Holdings GmbH.
and at two associated property management companies, Ronshine Service Holding co
and Powerlong Commercial Management Holdings GmbH.
according to the company’s stock market reports.
PwC in Hong Kong, a member of the global accounting network of the same name, is responsible for signing these financial statements as the companies are listed in the city.
PwC has exited its audit role at another company, Hopson Development Holdings GmbH.
, in January. Firms that are members of other international auditing networks, such as BDO, Deloitte and EY, have also withdrawn from auditing real estate firms in recent months, the developers said in exchange filings.
A number of other companies including China Evergrande Group,
have not parted with their auditors but have warned they will not be able to release audited results by March 31. Several of these companies including Evergrande, Guangzhou R&F Properties co
and Sunac China Holdings GmbH.
, are checked by PwC. The Hong Kong Stock Exchange may allow some stocks to continue trading if they can release unaudited numbers.
The recent resignations and warnings of financial reporting delays are signs that “auditors now take their job much more seriously than they did in the past,” said Michel Lowy, chief executive of SC Lowy, a financial institution specializing in distressed and high-yield debt. “The quality of disclosures has been very poor in the past,” he said.
The stakes have risen as hidden debt has surfaced at companies like Kaisa Group Holdings GmbH.
and Evergrande, sometimes through previously undisclosed guarantees for privately issued debt or wealth management products. Evergrande’s real estate management subsidiary recently announced that banks have taken control of more than $2.1 billion in bank deposits that they had pledged to guarantee third-party loans.
The disclosures surprised investors and rating companies. That has worsened already gloomy investor sentiment, pushing many bond prices to levels that imply investors have little hope of full redemption.
PwC in Hong Kong declined to comment. Hong Kong-based spokespersons for Deloitte, EY and KPMG did not respond to requests for comment.
PwC’s recent resignations come after PwC requested more information from the companies and said it could not give a timeframe for completing audits, the companies’ filings showed.
In the case of the developers Ronshine and Powerlong, the inquiries concerned the pledging of bank deposits, in the case of Shimao, trustee loan agreements between joint ventures and associated companies. At both Hopson and Shimao, both sides could not agree on an examination fee.
In October, Hong Kong’s Financial Reporting Council said it had questions about the adequacy of Evergrande’s going-concern reporting and would investigate PwC’s audit of Evergrande’s 2020 financial results.
It’s very unusual for auditors to resign so close to the annual results’ due date, said Nigel Stevenson, an analyst at GMT Research, a Hong Kong-based economic research firm. When successors step in, they should be able to access the information provided to their predecessors, but their teams would be starting from scratch at an unknown company, he said.
Ronshine and Powerlong both co-founded Hong Kong-based Elite Partners CPA Ltd. commissioned while Shimao Zhonghui Anda CPA Ltd. has commissioned, as can be seen from the documents of the three developers.
Given the sector’s financial distress, accounting firms will be alert to potential future legal risks, which in turn could prompt them to be tougher on clients, market watchers say.
Mr Lowy said there was precedent for accountants being sued as part of a bid to recover some value for creditors. This is sometimes done by liquidators after a company collapses.
In 2009, Hong Kong’s Ernst & Young paid an undisclosed sum to settle a case brought by the liquidators of Akai Holdings, a consumer electronics company that collapsed in 2000 and whose accounts it had audited in previous years .
To defend against such a lawsuit, auditors would need to demonstrate that they exercised due diligence in the auditing process, said Kevin Chen, a professor at Hong Kong University of Science and Technology.
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https://www.wsj.com/articles/chinese-developers-accounts-under-scrutiny-as-more-auditors-resign-11648551345?mod=rss_markets_main Chinese developers’ accounts come under scrutiny as more auditors step down