Know Your Customer - HNA

by: Paul Gillis

There is a shocking report that Goldman Sachs (NYSE:GS) has suspended its work on HNA's planned US IPO of subsidiary Pactera because it was unable to meet the bank's internal "know your customer checks". HNA has been criticized for its opaque ownership structure, but it is surprising that Goldman Sachs could not get a look under the sheets.

Bank of America Merrill Lynch (NYSE:BAC), Citigroup (NYSE:C), and Morgan Stanley (NYSE:MS) were reported earlier to have dropped HNA because of concerns over completing know your customer checks.

HNA's public companies are audited by PwC. This raises the question of how PwC is able to continue as auditor. Auditing standards require auditors to annually assess whether to continue a relationship with a client.

The IFAC's Code of Ethics for Professional Accountants states:

'Before accepting a new client relationship, a professional accountant in public practice shall determine whether acceptance would create any threats to compliance with the fundamental principles. Potential threats to integrity or professional behaviour may be created from, for example, questionable issues associated with the client (its owners, management or activities).'

This means that when approached to take on a new client, the firm should investigate the potential client, its owners and business activities in order to evaluate whether there are any questions over the integrity of the potential client which create unacceptable risk. These investigative actions are usually performed as 'know your client/customer' or 'customer due diligence' procedures, which are also carried out in order to comply with anti-money laundering regulations.

PCAOB auditing standards (that would apply to the Pactera IPO) also require PwC to undertake client acceptance procedures.

PwC has an excellent guide to the know your customer rules.

I would imagine that PwC is having some serious discussion about whether they can continue to serve as HNA's auditor. Certainly, the standards for an auditor are not lower than that for investment banks. If HNA loses its auditor, it will have great difficulty accessing capital markets. These events should be a clarion call for HNA that it must immediately improve its transparency.

Dislosure: None

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