The deadline for 2021 earning reports should be on March 31st. But over the past two weeks, at least nine Chinese property companies are not able to file their reports. Pandemic is to blame, but there is this messier hidden truth soared from off-balance-sheet debt. The off-balance-sheet debt problem has been a spotlight recently, especially when the borrowers keep making auditors happy by reporting the file on time.
Theoretically, hidden debt is a form of guarantee relating to entities.
This includes debt related joint ventures or private credit deals. So, in order for the company to avoid disclosing details of the debt. They can report it as a lump number under contingent liabilities attached in their report. They can then give no detail or indication about the liabilities. In other words, they can also give some time to guarantees. In this case they can be excluded from contingent liabilities consideration on the appointed dates. They do not even have to explain it in the annual results.
Developers began defaulting on bonds, the debt attracted huge public attention and concern last year. Auditors in this situation grow nervous about the sector. The epitome is PricewaterhouseCoopers (PWC) recent resignation. PricewaterhouseCoopers resigned from its auditor roles not long before the result of the audit of privately-owned Chinese property developers in the future. Although, the spokesperson from PWC declined the action.
A head of Asia at Lucror Analytics, Charles Macgregor, exposed his concern that when the hidden debt becomes public, it will shatter investors’ confidence in the sector. So, they adopt a shoot first, ask later approach to escape bad news. Unfortunately, there is no identification in finding hidden debt, especially when it yet meets disclosement in the financial guarantee note in the audited financial statement.
