Commentary on Political Economy

Monday 5 September 2022



KPMG landed with $830mn lawsuit after ‘appalling’ audit of Chinese group

KPMG has been accused of “appalling” audit work that allowed a US-listed Chinese biotechnology company to carry out a “brazen” $400mn accounting fraud, the Hong Kong High Court heard yesterday.

The liquidator of China Medical Technologies, which collapsed in 2012 and whose senior executives are wanted on fraud charges in the US, said the Big Four audit firm failed to ask “obvious” questions that would have “easily” exposed the fraud.

These included not questioning a related-party transaction by the group in 2006, when it acquired a Chinese diagnostics business worth $155,000 for $176mn, according to the liquidator.

It is suing KPMG on grounds that losses at China Medical “flowed from” its negligent audit work, which gave the accounts a clean bill of health in 2007 and 2008, according to the hearing. It seeks as much as $454mn to cover allegedly misappropriated cash and dividends paid to investors while the company operated under a negligent audit, plus interest of more than $376mn, according to a person close to the issue.

China Medical raised $426mn from international investors in two convertible bonds in 2008 and 2010. The company filed for liquidation in 2012, and in 2017 US prosecutors charged its founder and chief executive Xiaodong Wu and chief financial officer Samson Tsang with fraud, saying they had “made off” with the bulk of the proceeds.

The company’s liquidators at Borrelli Walsh had previously alleged that the wife of one senior executive gambled more than $100mn of the bond proceeds in Las Vegas casinos. KPMG has denied the allegations. Documents detailing its defence said the claims were “without merit [and] fail to demonstrate a plausible link between KPMG’s alleged breaches and the losses”. It has filed a counterclaim that alleges that China Medical made “false representations” to its auditors.

The case is the latest to have drawn attention to the audits of Chinese companies that list outside mainland China.

The Big Four auditors — also including PwC, Deloitte and EY — have faced scrutiny over their work checking the accounts of Chinese property developers and a string of US-listed groups that have been targeted by short sellers.

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