"We note the substantial increase in “audit-related fees” since 2008. Please describe for us the specific services included in this line item for 2010 and clarify for us how you determined that such amounts should not be characterized as “Audit fees”. Such disclosure should also be provided in future filings pursuant to Item 16C(b) of the Form Instructions.
We note the Staff’s comments and would like to clarify that the amounts included in “audit-related fees” for the year ended December 31, 2010 amounting to US$454,890 were fees paid to audit firms for audit services performed in conjunction with the Company’s subsidiaries’ statutory audits under PRC generally accepted accounting principles related to their annual PRC tax filings. As these fees were not paid to, nor related to professional services rendered by our principal auditor in connection with the audit of our consolidated financial statements, we will exclude these fees from our disclosure in future filings. "
Sounds like they are bribing auditors ;)
The company has to obtain an audit for the project subsidiary required by the tax authority. I did not know this was required. This is good to know. A little improvement in internal control, in that one more person, the auditor, now has to be duped or bribed in fraud. Overall, not something that will sway me to one extreme or another.
I am curious which of the following scenarios does everyone think is likely
Tom (AKA the King of Chinese Fraud and the former chairperson of Longtop Audit Committee) bribes a local Chinese CPA to certify the fraudulent statements with the local tax authorities. Unbeknownst to Tom, Lassie (Chen Li) the accounts payable clerk, whose English is only so-so, is very diligent but does not truly understand the meaning of principal in the SEC regulation. She reasons an auditor is an auditor and dumps the bribery payments into auditor’s fees. Tom because of his massive drinking problem miss this all through the preparation of the financial statements.
Clarabell the Clown (Zhang Jin), just graduated from college and assigned to the Xinyuan audit. He is very happy with this assignment and as he is of the age to start looking for his wife is very interested in Lassie’s opinions on everything. So much so, he runs out of time and sticks a work paper in the file for the account for audit fees, which baby accountants have been auditing since the dawn of time. He did not really do any work but he says it is ok anyway. He reasons, who cares it is not significant.
Felix (Ai Ma), is working his way up the ladder. As the senior accountant, he has a difficult job. Even though he knows the senior manager and partner are always interested in what the company is paying for professional services he signs off on Clarabell’s work.
Phillip (Tang Lu) is the senior manager. He is very keen to make his years of work payoff in partnership in E&Y. He thinks the partner on the engagement is getting too old perhaps, if he could embarrass the partner, he might be forced to retire. He immediately spots Clarabell’s work paper does not agree to the billing summary he has in the file right in front of him. Here is his chance at partnership. He will sign off on the work paper then point out in the report to the other partners, how their partner is not mindful of their income. That should do it.
William (Lingli He) is the audit partner. Phillip is right, he is past his prime. He spends most of the day in the office napping instead of working. He signs off on the work paper.
Bill is the second review partner required by EY procedure. He gets distracted at a critical moment in the review process by an e-mail from a stripper named Bambi that knows him as Studmuffin. The bribery gets past his review.
Clint is a subject matter expert in the New York E&Y’s SEC compliance office. He is part of the wrecking crew. He is Ivy League undergrad with an elite graduate degree from a prestigious NY professional graduate program. Clint is where he is at because he is never wrong. Partners stop talking and take notes when Clint talks. Except this time, a subtle birth defective kicks in when he is reviewing the most basic part of the Xinyuan filing and misses the bribery.
After the 20-F is flied, James on the SEC staff is assigned the Xinyuan statement for review. James career is on upward trajectory. After graduating Yale law, he has spent the last five years grinding out SEC filings at a prestigious New York law firm. He knows all the Chinese listing are under the microscope. He notices a large increase in audit fees year over year. Ah ha, he has discovered the bribery. He asks the company to explain the variance. Tom the villain blows some statutory audit lie past James, William, Bill, and Clint and thinks he is home free until…….
The bribery is discovered by the Yahoo Finance BB for XIN.
Judy is responsible for putting out E&Y’s client newsletter on SEC regulations. Clients and field staff look for guidance on firm policy on SEC reporting. It is an important job and Judy has two CPAs, a lawyer and one clerical staff to support her efforts. The newsletter is gospel for the field. If it is in the newsletter, then it is considered correct. Judy takes her job seriously.
She has become aware that the firm has been inconsistent in its reporting of audit fees. She polls some the offices on their reporting and discovers some report only E&Y primary audit fees, some include other audit fees, including E&Y fees. She has her staff look at other filings from other Big 4s. They appear to be inconsistent also but the majority seems to report all audit fees. After conferring with her practice partner and the newsletter being reviewed, the newsletter goes out with E&Y’s guidance.
Helen Zhang, the trusted Xinyuan controller, reads the newsletter and diligently passes on the instruction to Lassie. Clarabell figures Lassie’s purse would be too heavy to lug around and completes the audit fee work properly. As the work is proper, it sails through to James. Who asks the routine question on a review, as audit fees are a hot button. He gets a routine response and everyone moves on with life UNTIL……
Yahoo Finance BB finds the filing.
So, your view is that this thing's no big deal, as well? Then basically, I think we're in agreement.
This might be my fault. I came away from reading your first post on this thinking your view was that this might be big news, but I probably just misread the post.
In any event, sounds like we're back on the same page now. I don't need the SEC cite anymore.
PS: Does Gurnee really have a drinking problem, or was that just dramatic flair?
I haven't read your post yet, but I will right after this. Can you direct me to the SEC filing we're talking about? If you give me the form type, filing date, and relative position in the document the relevant section's located, I'm almost certain to find it. I can probably even find it on only some of that info, but can you give me what you've got?
I still haven't read it.
Is this the thing that Casey was talking about?
Because, yeah, I agree with Peregrine, this just sounds like the SEC's trying to make sure the company's not funneling kickbacks to its auditors by describing them as "audit related fees" as opposed to just "audit fees".
Where's that from, 2010's 20-F? If yeah, do you happen to have the Item number? (If not, no worries).
XIN's explanation is slightly dicey, though.
I mean, there's only one auditor, E&Y, who only does one audit, at the end of the FY, and of course, that audit is mostly an audit of XIN's subs, since the Delaware holding company only exists in cyberspace.
They use the term "audit firms", plural. Who else besides E&Y could they mean? They seem to imply these other audits might be CSRC mandated for the subs. I've never heard of that; is that how it works?
In any event, I don't think this is a big deal, good or bad.