Economic Observer reporter Lao YingyingBehind the dispute over audit fees, which are the most important issues, such as the liquidity of listed companies, audit fees, accountants do not agree with the handling of the company's accounts?
For four consecutive days starting from November 8, 2021, there have been frequent resignations of "big four" auditors in the Hong Kong stock market, involving listed companies including Xinyuan Services (1895.HK), Dasen Holdings (1580.HK), Zall Zhaopin (2098.HK) and 1173.HK International (1173.HK). The reason for resignation is that there is no consensus on audit fees.
A reporter from the Economic Observer found that except for the net profits of Xinyuan services of these listed companies in Hong Kong, the performance of the other companies is hardly satisfactory, some have increased their income without increasing profits for many years, and some have sustained losses and then have to carry out debt restructuring.
A reporter from the Economic Observer has learned from multiple interviews that generally speaking, there are three main situations in which audit fees cannot be reached between accounting firms and listed companies. the first is that companies are really unable to pay for audit fees when there are operating problems. The second is that when the size of the enterprise (assets, income, profits or the number of subsidiaries) increases greatly compared with the previous year, or when the auditor thinks that the audit fee of the previous year does not match the input workload, the enterprise may be asked to increase the audit fee, but the listed company is not willing to increase it. Another is that accountants do not agree with the way some accounts of listed companies are handled or there are some transactions, but it is difficult to say clearly that they find reasons why audit fees cannot reach a consensus.
There is no consensus on audit fees.
On November 8, Xinyuan Services announced that Ernst & Young had resigned as the company's auditor because the company could not reach a consensus with Ernst & Young on the audit fee for reviewing the company's consolidated financial statements for the year ended December 31, 2021. Upon recommendation of the audit committee, Dahua Ma Shiyun Accountants Co., Ltd. has been appointed as the company's auditor. According to Xinyuan Services' 2020 financial report, the total remuneration paid or payable to the company's auditor Ernst & Young for annual audit and other audit services is RMB 4.8 million for the year ended December 31, 2020.
A reporter from the Economic Observer called the investor relations office of Xinyuan Service as an investor, who said that Ernst & Young quoted prices according to the head enterprise, but like the volume of Xinyuan service, the net profit in 2020 is only 100 million. Although Dahua is not the "big four" but also belongs to the first line, but the offer is much less than Ernst & Young, so choose Dahua to give up Ernst & Young. According to the financial report, the company's operating income in 2020 was 653.7 million yuan, an increase of 22.43% over the same period last year, while the net profit attributed to the parent company was 128 million yuan, an increase of 61.03% over the same period last year.
In addition to Xinyuan service, in the same period, Hong Kong stocks also had the resignation of auditors of three listed companies. On November 9, Wigao International announced that Deloitte had resigned as auditor of the company. Deloitte said in its resignation letter that it had decided to resign as auditor of the company, taking into account a number of factors, including professional risks associated with the audit and the level of audit fees. The company confirmed that the audit fee for Deloitte auditors for the 2021 fiscal year ended March 31, 2021 was HK $2.773 million.
On November 11, Zall Zhaopin announced that KPMG had resigned as the company's auditor for a similar reason that KPMG had failed to agree with the company on audit fees for the year ended December 31, 2021. At the same time, the company announced the appointment of Hong Kong Lixin Dehao Accounting firm as the company's auditor. According to the 2020 results, Zall Zhaopin paid 5.2 million yuan to KPMG in 2020. "KPMG has increased its prices a lot this year, and we think it is too much. We have talked to them but have not reached a consensus." Zhuo Zhilian Investor Relations Department said to the Economic Observer.
On the same day, Omori Holdings announced that PricewaterhouseCoopers resigned as the company's auditor from November 10, 2021, because PricewaterhouseCoopers could not reach a consensus with the company's auditors' remuneration. In accordance with the recommendation of the Audit Committee, the Board has approved the appointment of Zhitong (Hong Kong) Accountants Limited as the auditor of the company. According to the 2020 financial report, the audit fee of PricewaterhouseCoopers will be 1.92 million yuan in 2020.
An auditor of the "Big four" told the Economic Observer that generally, when the size of the enterprise (assets, income, profits, or the number of subsidiaries) has increased significantly over the previous year, or the auditor thinks that the audit fees of the previous year do not match the input workload, a request for an increase in audit fees may be made to the enterprise.
What is the profit situation?
The reporter found that the above-mentioned Hong Kong stock listed companies, in addition to Xinyuan service net profit is increasing year by year, the rest of the performance is hardly ideal.
From 2017 to 2020, Zall Zhaopin did not increase its profit, and its revenue increased by 1733.66%, 152.22%, 29.91% and-0.18% year by year, but its net profit decreased by 42.53%, 93.21% and 1458.29% respectively from 2018. And in 2020, KPMG issued an unqualified annual report with highlighted paragraphs to Zall. KPMG said, "without making reservations, Xinyuan Service as at 31 December 2020, the net current liability of Xinyuan Service is RMB 3.668 billion and the net cash outflow from operating activities for the year ended that date is RMB185 million. The consolidated financial statements have been prepared in accordance with the continuing operating basis, the effectiveness of which depends on the continuous support provided by the banks and financial institutions of Xinyuan Services, and whether the future operation of Xinyuan Services can generate sufficient cash flow to support the operating costs of Xinyuan Services and meet its financial commitments. With the current current liabilities of the group, it is possible to have a greater uncertainty about the ability of Xinyuan service to continue to operate on a continuing basis. "
The type of audit opinion audit report is divided into standard audit report and non-standard audit report. Standard audit reports refer to unqualified audit reports that do not contain explanatory paragraphs, emphasis paragraphs, other matters paragraphs or any other decorative language; non-standard audit reports refer to unqualified audit reports and non-unqualified audit reports with highlighted or other paragraphs. Audit reports that are not unqualified opinions include qualified opinions, negative opinions and inability to express opinions.
The unqualified opinion with the highlighted paragraph indicates that the auditor believes that the financial statements prepared by the auditee meet the requirements of the relevant accounting standards and fairly reflect the financial position, operating results and cash flow of the auditee in all material respects, but there are matters that need to be explained, such as major doubts and major uncertainties about sustainability.
Vega International, which makes fashion and cosmetics, has been losing money, with revenue falling by 9.39 per cent, 4.42 per cent, 12.18 per cent and 38.44 per cent respectively from 2017 to 2020, while net profit "fluctuates". In addition to a year-on-year increase of 120.32% in 2018, it decreased by 1608% in 2019 and 225.70% in 2020. Veco International announced on November 12 that it expects a loss of about HK $18 million to HK $25 million by mid-2021, down from a loss of about HK $91 million in the same period last year.
In 2020, Deloitte issued an unqualified annual report with highlighted paragraphs to Vega International. Deloitte said it posted a net loss of HK $184 million in 2020, with current liabilities exceeding its current assets of HK $256 million. As stated in note 2 to the consolidated financial statements, the directors of Vega International are of the view that, based on management's judgment and estimation of key input data and market conditions, including business turnover and expenditure growth, working capital requirements and continuous renewal of bank financing facilities, Vega International will have sufficient funds to meet its financial obligations within at least the next 12 months. These situations, together with other matters contained in note 2 to the consolidated financial statements, indicate significant uncertainties that may raise significant questions about Vega's ability to continue.
Omori Holdings' operating income and net profit decreased year by year. From 2018 to 2020, its revenue decreased by 12.79%, 26.88% and 44.05% respectively, and its net profit decreased by 61.56%, 492.16% and 211.32%, respectively. In August, Omori Holdings reported a narrowing of its medium-term loss of 32.695 million yuan in 2021, compared with a loss of 96.394 million yuan in the same period last year, and operating revenue of 82.113 million yuan, down 3 percent from the same period a year earlier.
On November 30, 2020, Omori Holdings announced its decision to implement the proposed restructuring. It said its business had been adversely affected since the beginning of 2020 due to the uncertainty caused by the COVID-19 outbreak, the Sino-US trade war and China's slowing economic growth. The major operating subsidiaries in the mainland have also been reporting losses in recent years, while the subsidiaries of the company have been unable to pay dividends to the company and have encountered a number of domestic capital return problems. In addition, Omori Holdings received a number of writ of summons filed against the company by a number of creditors and made in the District Court of Hong Kong, with a total complaint amount of about HK $3.5 million. In view of the above, the board of directors of Omori Holdings considers that all debts and all claims against the company and its cash flow pressure can be alleviated by debt restructuring through the implementation of the creditor's plan. "in general, when audit fees are not agreed upon, it may be that the company really has no money, but this situation is unlikely, and the greatest possibility is that the accountants do not agree with the handling of some of the company's accounts or some transactions, but it is not easy to say clearly that there is no consensus on audit fees." A Hong Kong investment banker told the Economic Observer.