Big Four Firms Face Huge Potential Liability in Global Audits

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Fear in the European Union (EU) of the potential collapse of one of the Big Four accounting firms surfaced this week when a briefing document, prepared for members of the EU delegation meeting in Beijing with Chinese officials on accounting and auditing issues, was shown to XFN-Asia. “The audit firms wish to have a limit of their liability, at least to acts for which they can be held directly responsible for. There is a particular fear that the next corporate scandal would reduce the Big Four to Big Three,” it said, according to AFX News Limited.


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The audit giants have been lobbying member states for legislation that will limit their liability to shareholder claims. A study currently underway in the EU of the economic consequences of the liability issue will be concluded by September of this year, AFX News says.

“Towards the end of the year, I intend to be in a position to assess the options and decide what can be done,” the position paper said as a proposed response to a question about a collapse of any of the Big Four.

While the Big Four prepare for limited liability in the EU, China, a market in which they are all seeking a larger presence, is subjecting their audits to close examination and at times, public rebuke.

Last week, Ernst & Young (E&Y) was forced to retract data on nonperforming loans in China’s banking sector. E&Y estimated that China’s bank held $900 billion in bad loans, a number it later said was “factually erroneous” and “embarrassing.” But the official Chinese estimate of $164 billion is not accepted by most analysts, the Wall Street Journal says. “There are hidden NPLs there,” Mei Yan, a bank analyst at Moody’s Investor Services told the Journal. She said that Beijing’s estimates were based on a very narrow definition of a bad loan.

Deloitte and Touche has been sued in China for failing to expose falsified accounts in its audits of Guandong Kelon Electrical Holdings Co., AFX News says.

Japan’s Financial Services Agency (FSA) has been inspecting local affiliates of each of the Big Four firms and will issue a report in late June on the strength and independence of the firms, according to the Washington Post. Government officials in Japan, the Post reports, have indicated that they lack confidence in the ability of local Japanese firms to uncover fraud in their clients.

Chuo Aoyama PwC, a local affiliate of Pricewaterhousecoopers (PwC), was banned from auditing for two months by the FSA last week. While PwC said that it would support the affiliate, it announced that it would form a new Japanese auditing firm that will compete with Chuo Aoyama, that it hopes will be running by July, the Post says.

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