TSEC demands clear audits of China-based subsidiaries

This article was written by Susan Yu and published by the Taiwan Journal on May 12, 2006. It reports that the Taiwan Stock Exchange Corp., which administers the Taiwan's Stock Exchange, recently announced that it will take actin against listed companies that fail to provide reliable financial reports on the performance of their subsidiaries in China. For such a failure, the administrator recently suspended margin trading of shares in a company that operates Taiwan's largest home appliance and consumer electronics retail chain.

The company began to invest in facilities in China in the 1990s in order to manufacture electrical appliances and electronics. Three years ago, it also launched a retail chain to sell these products. The company has appointed a Chinese accountancy firm in China's Fujian Province.

The company sold its retail chain to a Shanghai-based company in July 2005. However, the Chinese accountancy firm failed to obtain sufficient proof to verify the amount of money that was owed by the company to its local suppliers. Because of this failure, the figures supplied by the company about its financial losses in 2005 were not accurate. Therefore, the Taiwan Stock Exchange Corp. decided to suspend margin trading of the company's shares until a full report on the company's operations in 2005 could be provided.

In Taiwan, suspension of margin trading normally targets at companies that are in financial trouble. However, the aforementioned company was the first one whose margin trading was suspended because of its failure to provide a reliable financial report on operations in China. The case has attracted much attention, not only because the majority of companies listed on the Taiwan Stock Exchange have investments in China, but also because many of these companies have consistently claimed that their Chinese investments are profitable. More significantly, there is now considerable suspicion about the reliability of Chinese accountancy firms.

In March 2006, the government proposed a set of measures that govern cross-strait economic affairs. One of these measures is for the government to authorize independent, internationally respected firms to visit and audit Taiwanese corporate investment projects in China. This measure may now be implemented by the government's Financial Supervisory Commission as a result of the case mentioned above.

The Importers and Exporters Association of Taipei recently conducted a survey among Taiwanese businesses that have operations in China. According to results of the survey, 90 percent of the 258 respondents said that they did not trust credit-checking agencies in China. More significantly, 55 percent of the respondents said that they had received late payments or no payments at all from the Chinese businesses they dealt with. Worse, 78 percent of these businesses are private enterprises, instead of state-run ones.