China Suspends Deloitte’s Beijing Unit and Fines It

Auditor is punished for its work with one of China’s largest bad-debt managers

China’s Finance Ministry has suspended the operations of Deloitte’s Beijing office for three months, citing “serious audit deficiencies” in the firm’s work with a big state-owned asset manager.

The move followed an investigation into its audits of China Asset Management Co., a firm which was bailed out in late 2021. The Finance Ministry said that Deloitte Hua Yong, the Chinese name of the auditor’s local affiliate, didn’t assess the true value of China Huarong’s assets or provide proper audit opinions on unusual transactions even after identifying them.

Deloitte said Friday that it had cooperated fully with the ministry’s inspection. “We respect and accept the Ministry of Finance’s penalty decision. We regret that, in this matter, the Ministry of Finance considers certain aspects of our work fell below the required auditing standards,” the firm said.

“To be clear, there is no suggestion by the Ministry of Finance that either Deloitte Hua Yong, its Beijing branch, or any of its people have done anything unethical,” it added.

The ministry also fined the auditor the equivalent of around $31 million.

Deloitte Hua Yong was the asset manager’s auditor in 2015, the same year it closed a $2.3 billion IPO in Hong Kong. It worked for China Huarong until the completion of the firm’s 2019 accounts, after which it was replaced by the local unit of Ernst & Young.

China Huarong was the largest of four state-owned bad-debt managers established in the late 1990s to clean up the balance sheets of China’s large state-owned banks. The asset manager initially focused on buying defaulted or troubled commercial loans, but over time expanded aggressively into other areas.

China Huarong’s troubles started to surface in early 2021, when the company didn’t release its 2020 annual report on time. Five months later, it revealed a $16 billion loss for that year. The company wrote down the value of many of its assets.

In late 2021, the asset manager was bailed out. A group of state-owned financial institutions injected $6.5 billion into China Huarong. Its former chairman, Lai Xiaomin, was handed a death sentence in January 2021 after pleading guilty to bribery and embezzlement. He was executed a few weeks later.

The Finance Ministry began investigating Deloitte Hua Yong’s auditing work of China Huarong in 2021. It set up a special inspection team to conduct on-site inspections at both China Huarong and Deloitte, interview relevant personnel, review documents, and conduct hearings.

Deloitte Hua Yong employs more than 20,000 professionals across 30 cities in China, the auditor said on its website.

The regulator also fined China Huarong and seven of its subsidiaries 100,000 yuan each, or about $14,500 each