China suspends Deloitte’s Beijing office over Huarong accounts

China’s state-clampdown on the world’s largest accounting and consulting firms has ramped up, with the country’s finance ministry issuing Deloitte with a massive fine, and barring it from operating in Beijing for three months.

The global professional services giant was stung with a 211.9 million yuan fee for reportedly failing to adequately assess the asset quality of China Huarong Asset Management.

China Huarong Asset Management is a Beijing-based company, which works as a manager of distressed and indebted firms across China. It is one of four major state-owned players in the segment – but has been facing distress of its own since 2020, when it failed to release its 2020 earnings on time.

China Huarong Asset Management eventually reported a huge loss – the manifestation of unspoken issues the company had suffered with from 2014 to 2019, with Huarong since revealing it faced problems including the failure of internal and risk controls, and the serious distortion of accounting information.

As the company continues to struggle, China’s authorities have been looking to prosecute its auditors, which have allegedly failed to perform their duties.

As a result, China’s finance ministry has come down hard on Big Four audit and advisory firm Deloitte. Not only will the firm be expected to pay 211.9 million yuan ($46 million) in fines, but Deloitte’s Beijing operations will also be suspended for three months.

According to the ministry, when providing auditing services to China Huarong Asset Management, Deloitte failed to perform its duty in objectively evaluating the quality of Huarong's assets. As has been the case for a number of accounting scandals involving the Big Four in the West, the ministry also determined that Deloitte did not effectively implement the necessary auditing procedures nor obtain sufficient and appropriate audit evidence – while showing serious auditing defects.

Responding to the charges, Deloitte said it respected and accepted the ministry’s decision. A statement published on the company’s website added it regretted that “in this matter, the Ministry of Finance considers certain aspects of our work fell below the required auditing standards.”

However, Deloitte also noted that it had not received any information from China Huarong Asset Management that it intended to make any restatement to its past financial statements, and no changes to the relevant audit reports had been found to be necessary.

In a separate statement, China Huarong Asset Management meanwhile noted that the company and its seven subsidiaries had each been fined 100,000 yuan. The news comes at another difficult juncture for the company, having reported an expected net loss of about 27.6 billion yuan ($4 billion) for 2022 – attributing the shortfall to factors including volatility in the capital market that led to declines in the value of some assets.

Looking ahead, China’s finance ministry said it will strictly crack down on violations of laws and regulations in the fields of accounting and auditing. The news comes shortly after the ministry warned Chinese firms against the use of Deloitte, PwC, EY and KPMG – amid concerns relating to data security.