A recent S&P report entitled ‘Corporate Financial Disclosure in Greater China: Taking a Closer Look’, has cast a withering eye over accounting practice in China, Hong Kong and Taiwan.
“One of the most common problem areas is not fully reflecting the leverage of a company by moving debt off balance sheet to joint ventures and associated companies,” comments John Bailey, director of corporate and infrastructure ratings at S&P. Other problems include profit smoothing – the transferral of income reserves to a later period to remove any troughs and peaks in the income flow.
Hong Kong in particular – perceived as a more developed economy – comes in for some harsh treatment. Debt obligations can often remain unaccounted for, and in one instance, S&P re-evaluated the debt-to-capital ratio of CLP Holdings – the Asian energy investor – from 20% to 55%. Paul Coughlin, S&P managing director of corporate and government ratings in the Asia-Pacific region, says: “Certainly in Hong Kong these issues are not confined to one or two companies – they’re rife.”
The report also focuses on the importance of cash-flow in evaluating the credit status of any corporate, and warns excessive reliance on earnings reports, which it notes, “are an abstract concept.”
