KPMG will pay about HK$650m (US$84m) to settle legal claims after failing to identify fraud at a Chinese timber company whose calamitous initial public offering led to a backlash against poor listing standards in Hong Kong.
The liquidators of China Forestry claimed KPMG was negligent when it failed to detect serious false accounting by some of the company’s top management ahead of its listing in 2009.
KPMG settled the lawsuit late 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 draw scrutiny on the audits of Chinese companies that list outside the mainland.
The Big Four firms are facing renewed pressure from US regulators to hand over the audits of their New York-listed Chinese clients for inspection. China prevents foreign authorities from viewing many of its sensitive documents, including audit files.
Earlier this month, after the debacle surrounding ride-hailing app Didi, China warned that US law requiring US-listed Chinese companies to submit to American audits could result in important data leaking beyond the country’s borders.
China Forestry raised $216m when it listed in Hong Kong but it was suspended from trading just over a year later after its auditor flagged accounting irregularities. The company, which had been backed by international investors such as Carlyle and Partners Group, was delisted in 2017.
In 2019, Hong Kong’s Securities and Futures Commission (SFC) fined four international banks — UBS, Standard Chartered, Morgan Stanley and Bank of America Merrill Lynch — a combined $100m for due diligence failures on a series of IPOs, including China Forestry.
UBS, which sponsored the listing, was banned from leading IPOs in Hong Kong for a year. It was the toughest action then taken by the territory’s regulator to prevent poor-quality listings after a string of scandals at newly listed companies.
China Forestry’s liquidators claimed KPMG failed to detect during a pre-IPO audit that executives had falsified the company’s assets and revenue by submitting forged bank statements and customer records. They also claimed that some KPMG staff fabricated audit papers while carrying out the work.
KPMG denied the allegations and claimed it was not negligent in failing to detect the fraud. It did not respond to a request to comment on the legal settlement. Borrelli Walsh, the liquidators to China Forestry, and Lipman Karas, their lawyers, also declined to comment.
The settlement agreed is about half of the HK$1.3bn of losses that were claimed by liquidators, according to one of the people familiar with the matter.
The SFC fines against the four banks in 2019 were viewed as a landmark moment for regulatory enforcement on IPOs in Hong Kong. The regulator had been viewed as struggling to strike a balance between maintaining an attractive destination for Chinese listings, which make up more than 80 per cent of the Hong Kong exchange’s market value, while also seeking to crack down on fraud and misreporting by some of the same cohort of companies.
KPMG is also facing a legal battle over alleged audit negligence against the liquidators of formerly US-listed China Medical Technologies, whose executives have been charged with defrauding investors out of more than $400m. The civil case against KPMG is expected to go to court in Hong Kong next year.