KPMG will pay about HK 650 million ($ 84 million) to resolve legal claims after failing to identify fraud in a Chinese timber company whose disastrous initial public offering led to a backlash against the rules of poor list in Hong Kong.
China Forestry liquidators said KPMG was negligent when it failed to detect false accounting by some of the company’s top executives prior to its listing in 2009.
KPMG resolved the case at the end of last month on the eve of a 10-week trial in Hong Kong, according to two people familiar with the matter.
The lawsuit against KPMG is the latest incident to scrutinize the audit of Chinese companies listed outside the continent.
The Big Four are facing renewed pressure from U.S. regulators to pass on the audit of their New York-listed Chinese customers for inspection. China is preventing foreign authorities from viewing many of its sensitive documents, including control files.
Earlier this month, following the debacle surrounding the Didi app, China warned that U.S. law requires U.S. companies listed in the U.S. to submit to U.S. checks that could leak important data to the public. beyond the borders of the country.
China Forestry raised $ 216 million when it was listed in Hong Kong, but was suspended from trading just over a year later after its auditor reported accounting irregularities. The company, which had been backed by international investors such as Carlyle and Partners Group, was removed in 2017.
In 2019, Hong Kong’s Securities and Futures Commission (SFC) has fined four international banks – UBS, Standard Chartered, Morgan Stanley and Bank of America Merrill Lynch – a sum of $ 100m for due diligence failures for a series of IPOs , including China Forestry.
UBS, which sponsored the listing, has been banned from conducting IPOs in Hong Kong for a year. It was the toughest action then taken by the land regulator to prevent low-quality lists after a string of scandals in newly listed companies.
China Forestry liquidators said KPMG was unable to detect during a pre-IPO audit that executives had falsified the company’s assets and revenues by submitting forged bank statements and customer records. They also stated that some KPMG personnel fabricated control documents while doing the work.
KPMG denied the allegations and stated that it was not negligent in not detecting the fraud. He did not respond to a request for comment on the legal establishment. Borrelli Walsh, liquidator of China Forestry, and Lipman Karas, his lawyers, also declined to comment.
According to one of the people familiar with the matter, the settlement agreement is about half of the HK 1.3 billion losses that have been claimed by liquidators.
The SFC fines against the four banks in 2019 were seen as a benchmark for regulatory enforcement on IPOs in Hong Kong. The regulator had been seen as struggling to find a balance between maintaining an attractive destination for Chinese listings, which make up more than 80 percent of the value of the Hong Kong exchange market, while seeking also to recapture fraud and mislead some of the same cohorts of companies.
KPMG is also facing a legal battle over alleged audit negligence against liquidators of the former China Medical Technologies listed in the United States, whose executives have been accused of defrauding investors of more than $ 400m. The civil case against KPMG is scheduled to go to court in Hong Kong next year.