Sometimes I come across a paper that in seeking to highlight one issue is helpful to me as an investor in inadvertently shedding light on another. The paper this week, from Donghui Wu and Qing Ye of the Chinese University (H.K.) and Sun Yat Sen University (Guangzhou) respectively is a good example.
The researchers wanted to see if the inclusion of an individual on China’s Hurun annual list of China’s wealthiest (published since 1999) affected the auditors of those individual’s company’s behavior? It does. If the wealth has been achieved via a dodgy route the level of Modified Audit Opinions (MAO) rises. If the wealth has been achieved by more obvious entrepreneurial activities, fees rise.
The general point and the one that’s important for investors is that auditors in China react in the same and prudential way Western peers might be expected to when companies/individuals become more prominent. In short the bigger the fish the harder the auditors work (skeptics of the reliability of Chinese bank’s reporting in particular are invited to consider this).
The paper also usefully highlights the consequences of an audit firm that loses public trust. Remember Arthur Anderson? You may as they were Enron’s auditor. At that time they had 28, 000 staff in the U.S. and 85, 000 worldwide. They now have 2oo (only!), all mostly employed to continue to mop up the mess. Ouch! doesn’t quite do it and I can’t think offhand of another business where a single failure could lead to such a catastrophic outcome?
You can access the paper via the following link Hurun Rich List.
Happy Sunday; hug an auditor!