Chinese companies told to step up data checks on auditors

China has told state-owned companies and those listed on the mainland to step up their security checks when appointing auditors, as authorities try to tighten controls on sensitive corporate information.

State-owned enterprises (SOEs) and listed companies should be more thorough in reviewing the ability of auditors “to safeguard information security” and “strengthen controls of sensitive information”, regulators said on Thursday.

The directive from the Ministry of Finance; the State-owned Assets Supervision and Administration Commission, the top supervisor for China’s state-owned groups; and the China Securities Regulatory Commission, the nation’s securities watchdog, also ordered companies to insert clauses that set out the responsibility that auditors have when handling sensitive information.

The intervention is the latest sign that China, the world’s second-biggest economy, is sharpening its focus on data and information security, potentially undermining its efforts to woo foreign investors.

The Big Four accounting firms have spent decades expanding their business in China, but their market-leading position has come under threat after a series of defaults and delayed financial results by clients.

The Big Four of Deloitte, KPMG, EY and PwC were the auditors for 30 of the biggest 50 Chinese SOEs by revenues as of 2021, according to a Financial Times review of the Chinese groups’ financial statements. Chinese rules require SOEs and domestically listed companies to rotate their auditors every eight years.

Analysts had predicted more action from regulators after the finance ministry in March shut down Deloitte’s Beijing operation for three months and hit the firm with a record $31mn fine for “serious deficiencies” in an audit of bad-debt manager China Huarong Asset Management.

In a subsequent meeting with the global chair of Deloitte, China’s vice-minister of finance said Beijing would step up scrutiny of accounting firms in China.

Regulators did not name any firms on Thursday but local auditors are also facing increased scrutiny. The Ministry of Finance said last month that it would set up a “high-tension wire” to eliminate accounting wrongdoing and fraud.

The pressure on auditors comes against a backdrop of an increasing number of raids by authorities on the Chinese offices of international consultancies, including Bain & Company.