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February 5, 2023

Auditing in China Sounds Like Pure Hell

Muddy Waters Director of Research, Carson Block wrote an op-ed for the Wall Street Journal today and he sheds some light on problems that Big 4 auditors are facing in China. And from the sounds of it, if you're used to the auditing standards in the west, then you have your work cut out for you:

[T]he prevailing business model in Big Four China offices creates questionable incentives. These offices have been under intense pressure to expand, especially since developed-economy markets are mature (and those economies are slow at the moment). In the hopes of producing growth, many firms have moved expatriate auditors to China. These receive valuable perks such as housing allowances and school tuition for their children, all of which create a strong incentive to stay.
 
Yet the reality of China Inc. is that auditors applying proper Western standards will often be short of business. Chinese companies often engage in a lot of complex financial practices that accountants in the West would never approve, and even simple tasks such as cash-balance verification can't be taken for granted. If an accounting firm were to refuse to sign off on audits of such companies, however, it would soon be out of work.
I guess this helps explain some the fraud allegations as well. If you're looking for a challenge, a Shanghai rotation may just be the ticket.
 

 

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