World View for Internal Audit: China

Just this past week, the U.S. Securities and Exchange Commission (SEC) resolved a long-standing dispute with the Chinese affiliates of the Big-4 Accounting Firms (KPMG, E&Y, PwC, and Deloitte) over their refusal to provide audit workpapers and supporting documents of US subsidiaries based in China. Part of the argument from the Chinese side is that these documents are considered “state secrets”. Really? What isn’t considered a “state secret” in China may be the better or more appropriate question?

Lately it appears that just about everything under the sun qualifies as “state secrets” or falls under some other “protected class” that restricts how you can deal with it and limits your options in the second largest economy on the planet.

While you could write this off as the world of statutory or external auditing… but a similar problem can exist with Internal Auditing as well. If you are a business with operations overseas and trying to identify a Chinese partner to audit your local Chinese operations you are likely to turn to one of the Big-4 firms, or a smaller second tier firm, since they have the size and connections. But you can expect to run into the same problem or something else just as frustrating. For example, who exactly “owns” the workpapers and work product – Your Company or the accounting firm doing the work on your behalf? (Hint: You do… you are paying for the work.  Of course they will need to keep copies, but the work product is yours)

And good luck trying to locate professionals in China who are both knowledgeable and experienced with western business practices and who may have even worked outside of China…but that is another topic for another time.

If I’m a finance executive and hiring a professional service firm to conduct an internal review or audit (think SOX) of my organizations local operations in China, I certainly expect that they work for me, and not the host country government.

While this may seem rather basic, but it is critical that something as basic as the ownership of the work product is not only discussed and agreed upon beforehand, but is also clearly documented in the engagement letter / contract. I would suggest that making the actual defined “work product” not only the final audit report, but also the workpapers and other relevant documents. This way payment of their bill is conditional upon receipt of not only their report, but the files as well

If the professional service provider (ie; the auditor) doesn’t address it, then you should ask and ensure that it is in the contract and make sure that you actually gain access (or get a copy) of those workpapers at the end of the review for your files.

The end result…there should be no question who “owns” the work product.

 

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