Posted by Lin Liye, Year 4 undergrad at the School of Economics, Singapore Management University

In March 2014, there was a CCTV report related to the supply of toxic gelatine by certain enterprises in food production, of which one of the enterprises named was a supplier to Labixiaoxin.

With respect to this update, PWC wanted to hire an independent advisor selected by PWC to investigate the allegations. However, Labixiaoxin had already hired an “independent advisor” on their own and had already “reported their findings to the company”. When PWC pursued the matter further and wanted to see the results and findings, Labixiaoxin used the argument that they could not agree with the audit fees payable to PWC to terminate the auditor relationship as below.

“On 5 May 2014, we were informed by Mr Zheng Yu Long that the Board of Directors could not agree on the expected timing and proposed fees for our extended audit procedures and procedures for the Investigation, hence the Company would like to terminate the auditor relationship with us.”

This is a serious red flag when the auditor is denied access to the company’s data, because the whole point of auditing is to validate the data that the company has to prove the authenticity of it.

However, what I wish to highlight here is that there are many examples where companies use the excuse that “there was no agreement between the company and the auditor on the audit fees payable” to mask a more serious problem behind the disagreements between the auditor and the company. This makes it seem as though there is nothing fundamentally wrong with the accounts of the company, when in fact minority shareholders should begin to seriously consider exiting the investment.

Statement from PWC:

Click to access LTN201406032054.pdf