Driving openness in China

A small team of auditors sends a big message to Beijing that prosperity among nations rests on universal values like transparency and rule of law.

The Monitor's View

Seldom does a staff mutiny within so small a firm cast so broad a ripple.

Last week, the German automaker Volkswagen said a Chinese-led inspection of its plant in Xinjiang, a province where state repression has drawn international criticism for years, found no evidence of forced labor. The assessment was endorsed by Löning, a Berlin-based business consultancy focused on human rights. Yesterday its roughly 20 employees publicly challenged the audit’s credibility.

The dispute is a reminder that the economic and security interests of nations cohere through transparency, the rule of law, and regard for human dignity. It comes at a moment when China, grappling with its worst economic slump in decades, faces new demands for openness.

European leaders confronted Chinese leader Xi Jinping in Beijing last week with a list of 13 China-based entities they accuse of breaking international sanctions imposed on Russia over its war in Ukraine. They have also taken steps in recent months to finalize a new European ban on goods made with forced labor.

The new law includes a framework for investigating companies and supply chains. It would take direct aim at the rapidly growing electric vehicle industry in China, where companies like Volkswagen are partnering with state-owned counterparts.

“Clearly, the Europeans are taking a much more robust stance than the Chinese were expecting or wanting to see,” Steve Tsang, director of the SOAS China Institute in London, told The Diplomat yesterday.

At a meeting last week, the Communist Party Politburo declared that it was “necessary to ... strengthen economic propaganda and public opinion guidance” to boost China’s economic recovery in the new year. That nod toward secrecy, however, tells an incomplete story.

In an agreement signed last year with Washington, Beijing opened access for foreign regulators to audit Chinese firms listed on overseas exchanges. Those audits cover both financial matters and social concerns such as labor practices. In most cases so far, foreign assessment teams have had to partner with local counterparts who collect and interpret the data. That is what led to the dispute at Löning. An unnamed Chinese law firm conducted the Volkswagen audit. The top two officials at Löning merely reviewed the assessment.

But a door once opened may be hard to shut. The Public Company Accounting Oversight Board, the main U.S. watchdog, has undertaken an audit of all 200 Chinese companies listed on American stock exchanges this year. It is also auditing the auditors. In a midyear report, the board found that three-fourths of the assessments it reviewed by U.S. and Chinese auditors contained an “unacceptable” level of deficiencies.

Such steps toward transparency and accountability may help seed a gradual shift in China’s governing culture based on secrecy. “Democracies ... have their own competitive advantage: openness,” wrote Christopher Walker, a vice president at the National Endowment for Democracy, in the journal Foreign Affairs. A small office in Berlin has sent Beijing a big reminder.