The Huishan collapse and the Big Four auditing firms

When Huishan, one of China’s leading dairy companies, lost 85 percent of its stock value at the end of March this year, it didn’t take long for Bloomberg to declare it a “poster child for weak corporate governance” and note the dangers of corporate debt in China. One writer in a piece for Sixth Tone, however, is now pointing the finger in a different direction: American auditing firms. Li Guangshou 黎光寿 writes, “KPMG, one of the world’s ‘Big Four’ accounting firms…had approved Huishan’s past three annual reports,” but “to date few have asked a key question: Why did a Big Four accountancy firm, with its scope and prestige, fail to detect fraud when given access to Huishan’s books?”

Huishan’s stock plunge had been preceded by Muddy Waters, an “activist hedge fund” as described (paywall) by the Financial Times, flagging Huishan as on the verge of financial collapse based on publicly available information. When it was revealed that Huishan was late in paying lenders three months later, Muddy Waters was proven correct. Therefore, Li argues, KPMG shouldn’t have given Huishan a green light, and the market dominance of the Big Four may have led to negligence.

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