The Hontex Scandal: Now, It's KPMG's Turn

Is it just me, or are the world’s accounting firms on a bad streak? First it was Ernst & Young getting into hot water because of its audit of electronics maker Akai and then of Lehman Brothers. Now comes news of KPMG’s problems with the initial public offering in Hong Kong of mainland Chinese textile and clothing maker Hontex International Holdings.   

 
“KPMG has a strong record in auditing and conducting due diligence on mainland companies preparing to list in Hong Kong,” reckons the Financial Times. But it apparently slipped in preparing the accounting statements for the Hontex IPO last year, which raised nearly HK$1 billion – that’s US$129 million.
 
On March 29, Hong Kong watchdog Securities and Futures Commission went to court to freeze the assets in Hong Kong of Hontex and four subsidiaries. “Hontex is alleged to have disclosed materially false or misleading information in its prospectus dated 14 December 2009, which was likely to have induced investors to subscribe for the Hontex shares,” said the regulator in a press release. “The SFC alleges that Hontex’s financial position as outlined in its IPO prospectus has been materially overstated.”
 
Strange twist
The financial accounts for the IPO, as it happens, were prepared by KPMG. The tale took a strange twist on April 8 when the Independent Commission Against Corruption (ICAC) charged KPMG senior manager Leung Sze-chit, 32, of offering a bribe of HK$100,000 (US$12,900) in February to his subordinate, Lau Shuk-ting, “as a reward for preparing the accountant’s report in the prospectus for the global offering of Hontex.”
 
It now appears that it was KPMG itself that informed on Leung. “The alleged payment was in fact discovered by KPMG through KPMG’s internal hotline,” the accounting firm said in an April 8 statement. “After investigation, the member of staff in question was suspended by KPMG and a report was then made by KPMG to the relevant authorities. KPMG has been, and continues, to co-operate fully with the authorities.’
 
The authorities have yet to officially link these various threads into a cohesive story, but it doesn’t need a Sherlock Holmes to make the connections. What the events of the last two weeks suggest is that Leung may have had a hand in the alleged overstatement of Hontex’s financial position, although it was Lau that actually prepared the accountant’s report.
 
According to the ICAC, the HK$100,000 bribe was offered to Lau on February 20 this year. It is unclear whether KPMG learned about the alleged wrongdoing after that incident or even before – the South China Morning Post reports that the unidentified whistleblower called KPMG’s internal hotline after Hontex completed bookbuilding for its IPO, which happened last December. (The shares started trading in Hong Kong on December 24).
 
New details will undoubtedly emerge. The ICAC has told the Court of First Instance that Leung could face further charges and requested more time to make further investigations. Lau had not been charged and is apparently still with KPMG. It is unclear what would happen to her if the allegations by the SFC that Hontex’s financial statements were overstated are proved to be true.
 
‘Misunderstanding’?
KPMG, Hontex and other players in the initial public offering may face civil suits from investors -- asset management companies were among the IPO buyers. Mega Capital, a Taiwan financial institution that served as the IPO’s sole bookrunner, sole lead manager and sole sponsor, has not made any public statement. The SFC will surely scrutinise its role.
 
Hontex has not released any official statement, but its founding chairman, Taiwan businessman Shao Tenpo, was quoted by Taiwan media as saying the company had done nothing wrong. “Hontex is financially sound and healthy,” he said. “The whole saga is only a misunderstanding caused by different interpretations of accounting treatments in Hong Kong and on the mainland.” 

 

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