Question

China Forestry liquidators are suing KPMG for $166 million for their audit of the company.

What difficulties does a Firm like KPMG have in auditing the Chinese Firm?

Answer 1

China Forestry has sued KPMG for being negligent while assisting the company’s listing in HKEX (Hong Kong Exchanges). The auditors of KPMG were unable to detect the false plantation assets and revenue reported by the former executives. The fraud came into the light when the company presented complex and uncommon increase in the financial position of the business. There were some inconsistencies in the revenue recognition policies of the company.

KPMG discovered that the cash inflows from the sales of the assets were not deposited in the bank account of the company. It also stated the inconsistency in the reclassification of the farmland as forest-land and its overvaluation.

KPMG was not able to detect the fraud because of the bureaucratic dilemma over the reporting of the items. The reclassification of the farm-and forest-land ownership is a subject to the state bureaucracy and the states did not present any clear guidelines about the reclassification.

Thus, the unclear guidelines from the state were the main reason behind KPMG’s incapability to detect the fraud.