China bond market: Dodgy numbers undermine ratings
China has made great strides in developing its bond market, but bankers and credit analysts admit there are still big problems with the accuracy of financial accounting.
By Rebecca Feng
A borrower’s financials are a crucial element of any credit rating. Yet in China, ratings analysts privately complain that some of the financial statements being presented to them are either dressed up or entirely falsified, even though local auditors have signed off on them.
This is just one area where there is scope to improve the ratings business in China.
“These financial statements are stamped by the auditing firms,” says an executive at a local credit rating agency. “We do not have the right to audit or validate the audited financial statements.”
A senior debt banker at a big-four bank says that local rating agencies could not be expected to verify all the numbers that are sent to them. The division of labour between auditors and rating agencies means that most numbers have to be accepted as fact.
“While the credit rating firms should always reasonably question the financial statements companies provide them, the opinions from the auditor have legal force,” he says. “Banks and credit rating agencies cannot just refuse to use these statements.”
There is an obvious solution: rating agencies could turn down business from companies if they think the accounts cannot be trusted.