Guangdong Auditor Starts Losing Clients Following Kangmei Scandal

A leading accounting firm in Guangdong was rattled by a crisis of confidence following a regulatory probe of its business related to allegations of financial fabrication by one of its major clients.

GP Certified Public Accountants Co. Ltd. lost two customers this week as the companies’ shareholders voted at annual meetings to terminate contracts with GP Certified, reflecting concerns over the accounting firm’s role in a high-profile disclosure scandal. GP Certified is the largest auditing company in Guangdong and was 22nd biggest in China in 2017.

The firm’s long-time client, Shanghai-listed traditional Chinese medicine supplier Kangmei Pharmaceutical Co. Ltd., was targeted by regulators on suspicion of fabricating a financial report involving a 29.9 billion yuan ($4.4 billion) overstatement of cash on hand. As the auditor of Kangmei, GP Certified was put under investigation by the China Securities Regulatory Commission (CSRC), Caixin learned from a source close to the company.

GP Certified is likely to face the loss of more business as more than 40 of its clients have yet to hold their annual shareholder meetings to decide on accounting partners. Market information provider WindInfo showed that GP Certified was the auditor of 92 listed companies in 2018.

If authorities find that GP Certified acted unscrupulously in Kangmei’s case, it could face a fine amounting to three to four times the amount determined to be illegal gains. The company may also face a suspension of its business license, a Guangdong investment banker said.

Shanghai-listed paper products producer C&S Paper Co. decided Tuesday to terminate its business with GP Certified after a shareholders meeting. The next day, Zhongshan Public Water Supply Co. made the same decision.

More of GP Certified’s clients are expected to terminate their contracts, the Guangdong investment banker said. GP Certified “won’t appear on brokers’ recommendation lists (for listed companies to partner with) for a while,” the banker said.

Meanwhile, 20 companies that have hired GP Certified as auditor to assist in initial public offering applications may face risks of review suspension because of the GP Certified probe, this person said.

Kangmei’s massive corrections to its financial report for 2017, including the 29.9 billion yuan overstatement in the company’s cash holdings, set a record, according to a Caixin calculation. Kangmei, whose stock is a component of MSCI Inc.’s global indexes, has been under investigation by the CSRC since late December for allegedly violating information disclosure regulations.

GP Certified has been Kangmei’s auditor since it went public in 2001. Kangmei paid the accounting firm 37 million yuan for services over the past decade, higher than the average paid by listed companies in the country. In 2017, GP Certified reported revenue of 492 million yuan.

Contact reporter Han Wei (weihan@caixin.com)