Seems nobody on the blogosphere is buying into Ernst & Young’s recent mea culpa admitting to have been wrong on its estimate of China banks’ bad debt holdings. The general view is that the retraction comes not from any re-calculation of the report’s numbers, but from a re-calculation of what the report will do to Ernst & Young’s own profit numbers.
David Bosco over at The Foreign Policy Blog has this to say, in his post, entitled, “In China’s Debt” [link no longer exists]:
Last week, I blogged briefly about a report by Ernst & Young on China’s looming bad loan problem. It painted a grim picture of China’s banking system, which is lending too much and collecting too little. For its part, the People’s Bank of China trashed the report, calling it “ridiculous and barely understandable.” Now, Ernst & Young has withdrawn it, claiming it was not properly reviewed. It’s a bizarre sequence of events, to say the least, and I can’t help wondering what kind of pressure China brought to bear on Ernst & Young.
The Asia Business Intelligence Blog, [link no longer exists] in its post, entitled, “Ernst and Young Retracts China Bad Loans Report,” had this to say:
Here’s what Jack Rodman, a managing director at E&Y, said when the report was issued, before the retraction:
“I think the numbers will be a big surprise because China has been giving the impression (with its banks listing overseas) that the problem is behind us,” said Jack Rodman, a managing director with E&Y. “China has not really resolved the issue – they have just moved it from one state enterprise to another.”
Wow! It was refreshing to hear so bold a comment uttered by an executive representative of a major western business operating in China. (We have been writing in a similar vain for a number of years.) But then came the muzzling of those who felt it safe to speak in earnest. What happened?
Read the press release carefully, as it appears to have been drafted with great care. Within this work of fine draftsmanship (I heartily commend the writer), one finds an explanation to its global readership. May I paraphrase?
“We, a global leader in professional services committed to restoring the public’s trust in financial accounting, told the world Chinese big four NPLs hit 358, but we were on the receiving end of some serious heat from the central bank the week it was issued, even though they characteristically didn’t announce us by name. And, anyway, we’re auditors for two of those banks, so what could we do? We haven’t any choice but to kow-tow if we want to keep the business — this is China and we’re in it up to our double chins. Ok, here’s the official number: $133 billion. We’re not saying explicitly that we avow the truth of that number, but it is the official version. Can you dig it?”
Sadly, none of the western press seems to have picked up on anything but the exact wording of the press release, making it appear as though E&Y was entirely at fault. At least, in the near term, their bold assertion may work to harm their reputation in the eyes of those who without China business experience. E&Y press relations people outside of China may wish to pitch the rest of the story, off the record, to their media contacts at some point.
The Epic of the Fall Blog posits a similar view in its post, bluntly entitled, “Ernst & Young Bullied To Withdraw NPL Report By Chinese Authorities.” [link no longer exists]
The title of the post on this at Doing Tha’ Deal Blog makes clear this bloggers’ views on the retraction: “We Bend Over For Our Clients.“
The China Business Services Blog, in its post, entitled, “Non Performing Accountants (and Loans),” though somewhat subtle, also appears not to believe Ernst & Young’s retraction:
Ernst & Young is quoted as saying: ‘Upon further research, Ernst & Young Global finds that this number cannot be supported, and believes it to be factually erroneous’. They added ”we sincerely regret any misleading views that the report conveyed’.
I bet they do! It does not help one’s domestic business to be picking up black marks from the government, your major clients or, as an accountant, to get your sums wrong’then again, who really does know the true state of China’s NPLs?
There is no way Ernst & Young can or should come out of this without looking bad. Either its initial report was sloppy and wrong OR they are willing to lie for money. Though I tend to think it is the later, I have not seen the hard evidence that would allow me to state this unequivocally.
And, as I mentioned in my initial post on the retraction, one of our readers early on posited that the Ernst & Young numbers were wrong because of double counting.
I would love to hear from any accountants who have had an opportunity to review the report. What do you think?