Introduction:
Twelve years ago, an organization released a 57-page report pointing out that Evergrande Group had a serious problem of financial fraud and predicted that it would inevitably explode. However, the agency, called Citron, was violently attacked and suppressed from all sides at the time, and finally had to make a compromise. Today, the warning voice of the citron has been proven correct, and the institutions and authorities that once criticized and criticized it need to take responsibility for their own judgments.
A sharp warning from the citron
Citron, as an institution focused on revealing the inside story of listed companies, is not entirely well-intentioned, and its business model is to write short reports and profit from them. However, they did find a number of suspicious things when analyzing Evergrande:
1. The growth rate of assets is too fast, which is 5 times that of the same industry.
2. Evergrande's land acquisition cost is 67% lower than that of its peers, and there may be bribery.
3. Equity cooperation projects with a large number of open shares and real debts to hide the true debt level.
4. The interest rate on deposits is much lower than that of peers, and the bank deposit situation is doubtful.
5. Cash flow continues to be negative, but the company borrows money at high interest rates, and its operating conditions are worrisome.
6. Overvaluing non-core assets such as football clubs.
Citron listed a number of doubts based on public information, and concluded that Evergrande was unable to repay its debts and that it was only a matter of time before the thunderstorm occurred. At that time, such an early warning naturally aroused the resentment and hostility of many people.
Gaffes from top institutions and negligence from auditors
Ironically, many top investment banks and authorities at the time rebuked Citron's report, calling it "lacking common sense". What is even more infuriating is that PricewaterhouseCoopers and other "Big Four" accounting firms, which have issued unqualified opinions for Evergrande for many years, have turned a blind eye to Evergrande's fraudulent behavior.
In fact, as early as 2011, the Ministry of Finance issued a document pointing out that Evergrande had a number of fraudulent behaviors such as assets, liabilities, and costs. In the years since, PwC has still issued an unqualified audit report on Evergrande's financial reports, which has encouraged Evergrande's fraudulent behavior.
As gatekeepers of the capital market, auditor firms are expected to uphold the highest professional ethics. The Enron incident is a lesson from the past, did the accountants who audited Evergrande deliberately turn a blind eye like Arthur Andersen did back then? Does this dereliction of duty involve a deeper collusion of interests? PwC has so far failed to provide a convincing explanation for all these doubts.
Conclusion:
Citron issued a thunderstorm warning to Evergrande 12 years ago, although it was questioned and suppressed by all parties, but time finally proved its sober view. On the other hand, the institutions and authorities that blamed Citron in the first place are now held accountable for their short-sightedness and gaffes.
What is more worth reflecting on is the role of accounting firms as gatekeepers. Are they also involved in the collusion of interests, and have done some degree of indulgence and connivance for Evergrande's counterfeiting? This is not only a major test for the audit industry itself, but also related to the integrity and fairness of the entire capital market. There is no doubt that this will be a problem that auditors will need to face and solve with the utmost courage and responsibility.
As the famous contemporary British writer Hurst said: "A man should guard his conscience and not be swayed by money or status." And this is the fundamental value that an auditor firm should uphold. It is believed that under the warning of the citron incident, all sectors of society will re-examine and rethink the professional ethics of auditors. After all, it is only by upholding integrity and independence that the public can earn the trust and respect of the public in the auditing profession.