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Monday, June 6, 2022

Did US biotechnology help to create Covid-19?

 


WHEN US President Joe Biden asked the United States Intelligence Community (IC) to determine the origin of Covid-19, its conclusion was remarkably understated but nonetheless shocking. In a one-page summary, the IC made clear that it could not rule out the possibility that SARS-CoV-2 (the virus that causes Covid-19) emerged from a laboratory.

But even more shocking for Americans and the world is an additional point on which the IC remained mum: If the virus did indeed result from laboratory research and experimentation, it was almost certainly created with US biotechnology and know-how that had been made available to researchers in China.

To learn the complete truth about the origins of Covid-19, we need a full, independent investigation not only into the outbreak in Wuhan, China, but also into the relevant US scientific research, international outreach, and technology licensing in the lead-up to the pandemic.

We recently called for such an investigation in the Proceedings of the National Academy of Sciences. Some might dismiss our reasons for doing so as a “conspiracy theory.” But let us be crystal clear: If the virus did emerge from a laboratory, it almost surely did so accidentally in the normal course of research, possibly going undetected via asymptomatic infection.

It is of course also still possible that the virus had a natural origin. The bottom line is that nobody knows. That is why it is so important to investigate all the relevant information contained in databases available in the US.

Missed opportunities

Since the start of the pandemic in early 2020, the US government has pointed an accusatory finger at China. But while it is true that the first observed Covid-19 cases were in Wuhan, the full story of the outbreak could involve America’s role in researching coronaviruses and in sharing its biotechnology with others around the world, including China.

US scientists who work with SARS-like coronaviruses regularly create and test dangerous novel variants with the aim of developing drugs and vaccines against them. Such “gain-of-function” research has been conducted for decades, but it has always been controversial, owing to concerns that it could result in an accidental outbreak, or that the techniques and technologies for creating new viruses could end up in the wrong hands. It is reasonable to ask whether SARS-CoV-2 owes its remarkable infectivity to this broader research effort.

Unfortunately, US authorities have sought to suppress this very question. Early in the epidemic, a small group of virologists queried by the US National Institutes of Health told the NIH leadership that SARS-CoV-2 might have arisen from laboratory research, noting that the virus has unusual features that virologists in the US have been using in experiments for years – often with support from the NIH.

How do we know what NIH officials were told, and when? Because we now have publicly available information released by the NIH in response to a Freedom of Information Act (FOIA) request. We know that on Feb 1, 2020, the NIH held a conference call with a group of top virologists to discuss the possible origin of the virus. On that call, several of the researchers pointed out that laboratory manipulation of the virus was not only possible, but according to some, even likely. At that point, the NIH should have called for an urgent independent investigation. Instead, the NIH has sought to dismiss and discredit this line of inquiry.

Heads in the sand

Within days of the Feb 1 call, a group of virologists, including some who were on it, prepared the first draft of a paper on the “Proximal Origin of SARS-CoV-2.” The final draft was published a month later, in March 2020. Despite the initial observations on Feb 1 that the virus showed signs of possible laboratory manipulation, the March paper concluded that there was overwhelming evidence that it had emerged from nature.

The authors claimed that the virus could not possibly have come from a laboratory because “the genetic data irrefutably show that SARS-CoV-2 is not derived from any previously used virus backbone.” Yet the single footnote (number 20) backing up that key claim refers to a paper from 2014, which means that the authors’ supposedly “irrefutable evidence” was at least five years out of date.

Owing to their refusal to support an independent investigation of the lab-leak hypothesis, the NIH and other US federal government agencies have been subjected to a wave of FOIA requests from a range of organisations, including US Right to Know and The Intercept. These FOIA disclosures, as well as internet searches and “whistleblower” leaks, have revealed some startling information.

Consider, for example, a March 2018 grant proposal submitted to the US Defense Advanced Research Projects Agency (DARPA) by EcoHealth Alliance (EHA) and researchers at the Wuhan Institute of Virology (WIV) and the University of North Carolina (UNC). On page 11, the applicants explain in detail how they intend to alter the genetic code of bat coronaviruses to insert precisely the feature that is the most unusual part of the SARS-CoV-2 virus.

Although DARPA did not approve this grant, the work may have proceeded anyway. We just don’t know. But, thanks to another FOIA request, we do know that this group carried out similar gain-of-function experiments on another coronavirus, the one that causes Middle East respiratory syndrome (MERS).

In yet other cases, FOIA disclosures have been heavily redacted, including a remarkable effort to obscure 290 pages of documents going back to February 2020, including the Strategic Plan for Covid-19 Research drafted that April by the US National Institute of Allergy and Infectious Diseases. Such extensive redactions deeply undermine public trust in science, and have only served to invite additional urgent questions from researchers and independent investigators.

In a one-page summary, the IC made clear that it could not rule out the possibility that SARS-CoV-2 (the virus that causes Covid-19) emerged from a laboratory. – AFP 
In a one-page summary, the IC made clear that it could not rule out the possibility that SARS-CoV-2 (the virus that causes Covid-19) emerged from a laboratory. – AFP

The facts of the case

Here are ten things that we do know.

First, the SARS-CoV-2 genome is distinguished by a particular 12-nucleotide sequence (the genetic code) that serves to increase its infectivity. The specific amino acid sequence directed by this insertion has been much discussed and is known as a furin cleavage site (FCS).

Second, the FCS has been a target of cutting-edge research since 2006, following the original SARS outbreak of 2003-04. Scientists have long understood that the FCS holds the key to these viruses’ infectivity and pathophysiology.

Third, SARS-CoV-2 is the only virus in the family of SARS-like viruses (sarbecoviruses) known to have an FCS. Interestingly, the specific form of the FCS that is present in SARS-CoV-2 (eight amino acids encoded by 24 nucleotides) is shared with a human sodium channel that has been studied in US labs.

Fourth, the FCS was already so well known as a driver of transmissibility and virulence that a group of US scientists submitted a proposal to the US government in 2018 to study the effect of inserting an FCS into SARS-like viruses found in bats. Although the dangers of this kind of work have been highlighted for some time, these bat viruses were somehow considered to be in a lower-risk category. This exempted them from NIH gain-of-function guidelines, thereby enabling NIH-funded experiments to be carried out at the inadequate BSL-2 safety level.

Fifth, the NIH was a strong supporter of such gain-of-function research, much of which was performed using US-developed biotechnology and executed within an NIH-funded three-way partnership between the EHA, the WIV, and UNC.

Sixth, in 2018, a leading US scientist pursuing this research argued that laboratory manipulation was vital for drug and vaccine discovery, but that increased regulation could stymie progress. Many within the virology community continue to resist sensible calls for enhanced regulation of the most high-risk virus manipulation, including the establishment of a national regulatory body independent of the NIH.

Seventh, the virus was very likely circulating a lot earlier than the standard narrative that dates awareness of the outbreak to late December 2019. We still do not know when parts of the US government became aware of the outbreak, but some scientists were aware of the outbreak as of mid-December.

Eighth, the NIH knew as early as Feb 1, 2020, that the virus could have emerged as a consequence of NIH-funded laboratory research, but it did not disclose that fundamental fact to the public or to the US Congress.

Ninth, extensive sampling by Chinese authorities of animals in Wuhan wet markets and in the wild has found not a single wild animal harboring the SARS-CoV-2 virus. Despite this, there is no indication that the NIH has requested the laboratory records of US agencies, academic centers, and biotech companies involved in researching and manipulating SARS-like coronaviruses.

Tenth, the IC has not explained why at least some of the US intelligence agencies do in fact believe that a laboratory release was either the most likely or at least a possible origin of the virus.

Time for transparency

Given the questions that remain unanswered, we are calling on the US government to conduct a bipartisan investigation. We may never understand the origin of SARS-CoV-2 without opening the books of the relevant federal agencies (including the NIH and the Department of Defense), the laboratories they support, academic institutions that store and archive viral sequence data, and biotechnology companies.

A key objective of the investigation would be to shed light on a basic question: Did US researchers undertake research or help their Chinese counterparts to undertake research to insert an FCS into a SARS-like virus, thereby playing a possible role in the creation of novel pathogens like the one that led to the current pandemic?

Investigations into Covid-19’s origins should no longer be secretive ventures led by the IC. The process must be transparent, with all relevant information being released publicly for use by independent scientific researchers. It seems clear to us that there has been a concerted effort to suppress information regarding the earliest events in the outbreak, and to hinder the search for additional evidence that is clearly available within the US. We suggest that a panel of independent researchers in relevant disciplines be created and granted access to all pertinent data in order to advise the US Congress and the public.

There is a good chance that we can learn more about the origins of this virus without waiting on China or any other country, simply by looking in the US. We believe such an inquiry is long overdue. – Project Syndicate

Neil L. Harrison is a professor at Columbia University. Jeffrey D. Sachs, university professor at Columbia University, is director of the Center for Sustainable Development at Columbia University and president of the UN Sustainable Development Solutions Network. This article was first published on Project Syndicate. 

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Shenzhou-14 spacecraft delivers three taikonauts to China Space Station to complete national space lab construction



See-off ceremony for China's Shenzhou-14 crew

 A see-off ceremony for three Chinese astronauts of the Shenzhou-14 crewed space mission is held at the Jiuquan Satellite Launch Center in northwest China.The three astronauts will be sent to China's space station combination for a six-month mission. #Shenzhou14 (Courtesy of CGTN)


 

Sitting atop the Long March-2F Y14 carrier rocket and carrying three taikonauts - the third crew to enter China's Tianhe space station core module - Shenzhou-14 is launched at 10:44 am on Sunday morning from the Jiuquan Satellite Launch Center in Northwest China's Gansu Province, amid sweaty palms and pounding hearts of millions of thrilled stargazers across the world.

After a flight of around 577 seconds, Shenzhou-14 manned spacecraft separated with the rocket, and entered designated orbit, with crew onboard in good conditions, marking a full success of the launch mission, Global Times learned from the China Manned Space Agency.

The Shenzhou-14 craft is scheduled to, similar to the previous missions, conduct a fast and autonomic rendezvous and docking with the radial port of the Tianhe module, while the exact time has yet to be released. It took the Shenzhou-13 mission merely six and a half hours to achieve the feat.

Shenzhou-14 will mark the first crewed spaceflight mission to Tianhe at the China Space Station in-orbit assembly stage.

The Wentian and Mengtian space station lab modules, the Tianzhou-5 cargo spacecraft, and the Shenzhou-15 manned spacecraft are expected to be launched during the Shenzhou-14 crew's six-month stay in orbit, which would be a new experience for the taikonauts in Tianhe, as it is unprecedented in the previous two groups of space station crew.

The space station combination would also see the simultaneous stay of six taikonauts in orbit, as the Shenzhou-14 and Shenzhou-15 crew members are expected to conduct their rotation in orbit for about a week, which would be another breakthrough in China's manned spaceflight history.

Senior Colonel Chen Dong, 44, is a veteran taikonaut who visited space in China's Shenzhou-11 manned space mission in 2016 and set the previous record for the longest stay in space by a Chinese astronaut at 33 days (in the Tiangong-2 space lab).

The record was broken by Shenzhou-13 taikonaut Wang Yaping in 2022, and Chen would be able to further surpass that with another 180 days of stay in space in the Shenzhou-14 run.

Senior Colonel Liu Yang, a female crew member joining Shenzhou-14, also 44, went to space in 2012 in the Shenzhou-9 mission, and is in fact the first Chinese woman to do so. At a press conference on Sunday, she said that for the upcoming 6-month stay, she and her crewmates are looking forward to celebrating for the first time the birthday of their motherland on October 1 as well as the Mid-Autumn Festival, a holiday for the reunion and gathering of the Chinese people. This year's Mid-Autumn Festival falls on September 10.

Senior Colonel Cai Xuzhe, 46, will be making his maiden voyage during the upcoming mission. "For this day, I have prepared 12 years. I feel honored and proud to have this chance to go into space for my country," he said.

The Shenzhou-14 crew are, together, the second batch of taikonauts China has trained.

Commenting on the younger lineup in which the older, first group of veterans are not included, Pang Zhihao, a Beijing-based senior space expert said that the new Shenzhou taikonaut trio must have showed outstanding performance during training, and the younger crew members have mastered new knowledge and new skills for the mission.

Pang told the Global Times that the Shenzhou-14 crew is still made up of two veterans and one newcomer just like the Shenzhou-12 and Shenzhou-13 missions. And that the younger crew members would have better stamina and could deliver on more complicated tasks such as the installation and testing of two lab modules.

The trio is slated to carry out the verification of big and small robotic arms, spacewalks, and the construction of payload outside the cabin, the Global Times learned from the Shenzhou spacecraft developer with the state-owned aerospace contractor China Aerospace Science and Technology Corp (CASC.)

Like during the previous missions, the Shenzhou-14 crew will also give Tiangong classes to earthbound youngsters, and will for the first time use the airlock cabin in the Wentian module to exit the station for extravehicular activities. These activities will be arranged two to three times during their stay, the Global Times has learned.

The basic structure of the space station, consisting of the Tianhe core cabin and the two lab modules ̶ Wentian expected in July and Mengtian in October ̶̶ will be completed during this mission, thus establishing a national space laboratory.

The laboratory will contain 25 cabinets for a variety of scientific experiments, each of which can function as an individual lab, reaching an overall international advanced level, Lin Xiqiang, deputy head of China Manned Space Engineering Office, told the Global Times.

Wentian lab will mainly focus on the study of space life sciences, which can support the growth, development, genetics and aging of multiple species of plants, animals and microorganisms under space conditions.

Mengtian lab will be oriented to microgravity scientific researches and is equipped with experimental cabinets for fluid physics, materials science, combustion science, basic physics and space technology experiments.

Later, a space telescope research facility, the Xuntian telescope, will be launched into orbit and fly with the space station to carry out wide-area survey observations.

Another highlight for the Shenzhou-14 mission is the maneuvering of a small robotic arm installed on the Wentian module. Compared with the large robotic arm which has been launched into space with the Tianhe core cabin, the small one is more compact, Lin noted.

The weight and length of the small robotic arm are about half of the large one, and the load capacity is about one-eighth of the large arm. It also has a more flexible movement and manipulation than the large arm.

The small robotic arm has a higher positioning accuracy, with the precision of positioning five times and that of attitude control twice than the large arm. Therefore it can complete more fine operations.

What's more, the small and large robotic arms can coordinate with each other to cover wider scopes of work outside the cabin, and the combination will be capable of achieving a greater variety of tasks.

The Shenzhou-13 mission safely returned back to Earth on April 16 in a historic feat, thus concluding the technology verification stage of China's space station. The three crew members - Zhai Zhigang, Wang Yaping, and Ye Guangfu ̶ has completed their quarantine smoothly with cardiopulmonary functions and other body indicators recovering to their pre-flight levels.

They are currently in the second phase of recovery that focuses on muscle and bone recovery. In general, the three taikonauts are in good physical and mental condition, and the recovery of various physiological and psychological indicators is in line with expectations, the Global Times has learned.

Graphic: Chen Xia/GTGraphic: Chen Xia/GT

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Sunday, June 5, 2022

‘China free to set Asia policy’

      Australian Prime Minister Anthony Albanese, US President Joe Biden, Japanese Prime Minister Fumio Kishida, and Indian Prime Minister Narendra Modi attend the summit of the Quadrilateral Security Dialogue (Quad) in Tokyo, Japan, on May 24, 2022. [Photo/Xinhua]

China free to set Asia policy despite US


 

China: Rise of an Asian giant Insight

China has come a long way since the establishment of the Peoples Republic of China (PRC) in 1949. From a poor agrarian society, it has now emerged as an industrial powerhouse, contributing nearly 30 percent of the world's economic growth. It has even overtaken Japan as the world’s second largest economy and lifted 800 million people out of poverty within just a single generation.

But 70 years on, the Communist Party of China under the leadership of its strongman President Xi Jinping is facing the greatest test of its leadership. The continuing social unrest in Hong Kong, a slowing economy and the escalating trade war with the United States are threatening its undermine his China dream. Can the tremendous progress that China has achieved so far simply falter from now on? Or will China continue to prevail as a force to be reckoned with in spite of all these challenges 70 years after its birth?

With 'its own destiny', Beijing's positive agenda can resist meddling, expert says

China should follow its own path and positive agenda for the Asia-Pacific region despite recent steps by the United States to enlist others to encircle it, according to a China expert.

“China is one of those few countries in the international system which is in control of its own destiny,” Sourabh Gupta, a senior fellow at the Washington-based Institute for China-America Studies, said. “If it can attain the potential it has inside, it doesn’t have to depend on or wait for any country, including the US.”

Over the past month, the US has conducted a series of moves relating to the region around China, including hosting the US-Asean Special Summit, announcing the so-called Indo-Pacific Economic Framework, or IPEF, and leading the Quad summit and issuing a joint statement with its partners.

The IPEF launch and the Quad summit were cast as highlights of Joe Biden’s first visit to Asia as the US president in late May. The Quad brings together the US, Australia, India and Japan in a security arrangement viewed by many as an effort to contain China.

US Secretary of State Antony Blinken last week gave a comprehensive speech on China policy in which he defined the main theme of US-China relations as competition. He noted that the US would “shape the strategic environment around Beijing” and “win the competition for the future”.

However, Gupta characteristics the US’ recent initiatives as a “China-minus strategy”.

At the end of the day, a ‘China-minus’ strategy amounts to a China-encirclement strategy,” he said.

At this time, Washington knows that most countries in Asia are not ready to commit to such an encirclement strategy. As such, it has framed its strategy and policies...from the Quad to the IPEF... on the basis of a ‘China-minus’ formula.”

And he expects that formula “will fail too because China sits at the heart of most of the region’s economic, technology and developmental networks, and other countries do not have the depth of commitment or the deep pockets to challenge Beijing”.

“Biden’s expectation is that the relevant Asian nations will, at his prompting, strive to build further complementarity between their policies and the US’ policies in these selective areas of decoupling,” Gupta said.

China was not mentioned much at the US-Asean summit in Washington, during Biden’s visit to Japan and South Korea, or at the Quad summit in Tokyo and in the joint statement that followed it.

But Gupta said China was the subtext in many important discussions and in the joint statement. — 

"The goal here is to give the impression that the Quad is not an anti-China encirclement body but one that has a positive agenda of practical cooperation to furnish public goods in the Indo-Pacific region," he said.

"I think aside from the four countries, nobody else is fooled in this regard. Everyone understands that the Quad is directed against China. And frankly, even within the four countries, there are very few takers of their foreign office-policy line that the Quad is not China-obsessed."

Before Biden's trip, China's top diplomat, Yang Jiechi, warned US national security adviser Jake Sullivan on May 18 that the US was "on the wrong path" regarding Taiwan, and that its moves could lead to "dangerous situations".

Wedge issue

Gupta said: "The Biden administration has not followed through in its deeds in terms of what the president himself promised in words to President Xi Jinping.

"As such, there is understandable apprehension in Beijing that Washington is attempting to use the Taiwan issue as a wedge issue and deepen divisions between China and other East Asian countries too."

When asked, Biden said the US would defend Taiwan militarily, but afterward, the White House, the State Department and Blinken, in his speech, said that recognition of the one-China policy would not change.

Gupta said it seemed like "a two-step play".

"This happened last October, and I fully expect it to happen again in the future," he said. "I don't think this has to do with lack of policy management. The president seems determined to politically show strength, not weakness, on Taiwan policy, and leave it to his White House team thereafter to restore the equilibrium on the finer details of the policy."

The US and Taiwan launched trade talks on Wednesday, a move that was strongly condemned by Beijing.

 -- China Daily/ANN 

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 Shenzhou-14 mission to head for China Space Station on Sunday, to complete ...

Shenzhou-14 mission to head for China Space Station on Sunday, to complete ...

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s it arrogance or inferiority to engage in ‘critical dialogue’ with China?: Global Times editorial

China US Illustration: Liu Rui/GT China US Illustration: Liu Rui/GT

The Chinese-language website of Deutsche Welle on Tuesday published a commentary entitled "Maintaining critical dialogue with China is more important than ever." The article is filled with clichés about so-called "human rights issues in Xinjiang," which are not worth reading. But the phrase "critical dialogue" in the headline is intriguing. It is in fact the main attitude of the US and other Western countries in communicating with non-Western nations in recent years.

This is, in most cases, an unconscious revelation of American and Western elites' inner feeling of superiority. But now they put it forward consciously and promote it as an "effective way" to deal with China. This cannot be explained simply by "pride and prejudice." They did not articulate it in the past, but Western countries have been practicing and enhancing the so-called critical dialogue with China. It has become an approach or even a weapon in the West's strategic game with China. In other words, they are trying to "lecture" China under the cover of "dialogue."

In global interactions, disagreements are common. It is also normal to express different views or even criticize without mincing words. However, equal dialogue cannot be based on the premise that some values are superior to others. It also cannot be only one party lecturing or accusing the other. The US and the West's "critical dialogue" is condescending, and the implied logic is that only they have the ability, qualification and power to determine right and wrong. This means that one party already claimed the moral high ground before the "dialogue" even begins, which dwarfs the development level and moral image of other countries.

Colonialism has long been discarded as something despicable, but Western-centric power structures and mentality have not disappeared completely. Colonialism has been subtly transplanted into various aspects, lurking in Western political language and communication methods. Some elites in the US and the West, with a strong sense of superiority on civilization, regard non-Western countries as candidates waiting for their "approval." With ideological pointers in their hands, they took to the podium to oversee exams, judge papers, and then grade them based on the "performance" of these countries to determine whether they passed the exam. As for the standard of scoring, it is drawn by the US and the West according to their own historical and social formations, and "Western-centrism" is the only correct answer in all the exams.

In their eyes, only the West is right, civilized and advanced, while those who differ from them are branded as "evil," barbaric and backward. They forcibly create a dichotomy between "civilization" and "barbarism." On this fictional premise, they attach moral labels on different practices of other countries, trying to dwarf them in image so that they can "attack others from a high position" as they wish. It is for this reason they recklessly fabricate the lie of "genocide" in Xinjiang, audaciously call for "punishing China" by various means, and frantically threaten to bomb China "back into the Stone Age."

Sometimes, arrogance is a kind of overbearingness; sometimes, it is also a kind of deep inferiority. In the face of the rise of emerging market countries, including China, and their own troubles, the US and other Western countries are becoming increasingly overwhelmed. Faced with the narrowing gap between them and emerging market countries, they have to rely on slogans of "human rights" and "democracy" to maintain their "absolute advantage." The reason why they are so sensitive to their position in the dialogue is that they are aware of the disappearance of the absolute advantage they used to have. As a result, they have to deliberately highlight their discourse power to maintain the obsolete power structure behind it, which has become a subconscious reaction.

Even in the fields of human rights and democracy, the US and the West are increasingly lagging behind, relying only on slogans, posturing and fist-pumping to show their "self-esteem," which is actually laughable to the rest of the world. The West's self-confidence is collapsing, as the democratization of international relations is increasingly popular and as developing countries' awareness of their rights is strengthening. Today, if someone still wants to engage in colonialism and ideological hegemony, or even imagines leading other countries by the nose like livestock, no country with national pride and a sense of independence will obey.

Returning to the "critical dialogue," China has never been afraid of criticism, but firmly opposes hegemony. Times have changed, and US and Western elites should learn to be equal and respectful. Dialogue is necessary, and we welcome "constructive dialogue," but we reject "critical dialogue." We would also like to remind that a condescending posture is dangerous, because the farther you are from the ground, the harder you may fall. 

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Chinese envoy to the United Nations on Thursday sternly refuted the allegations of “genocide” made by the US and the UK over human rights situation in China's Xinjiang region, after the two countries took a Security Council meeting on international law and maintaining peace and security as a chance to attack China on Xinjiang-related issues. They have also called on another “investigative” trip to Xinjiang on Thursday after they found that the UN human rights chief's recent visit to Xinjiang had failed to support their “genocide” fallacies about the region.
 
US govt 'biggest producer of terrorism within or outside America,' victims around the world should sue: experts

After frequent gun shooting cases nationwide in the US that caused heavy casualties, including children, the White House and Capitol Hill are trying to show that they are trying to find a solution under pressure from society, as US President Joe Biden said Congress "must act to pass gun control legislation." 

 

The US, whose flag flies over 750 military bases in more than 80 countries and regions, seems to be sitting on pins and needles after witnessing China sign ONE security cooperation framework agreement with the Solomon Islands. On Tuesday local time, US President Joe Biden met with New Zealand Prime Minister Jacinda Ardern in the White House. Their “shared concern” about China's security agreement and “China's Pacific ambitions” were soon placed under the spotlight of Western media outlets.

 

 

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Thursday, June 2, 2022

UK audit shake-up after spate of corporate failures; The two sides of the EY break-up

 

The Big Four

Britain to shake up audit market after Carillion crash

Britain to shake up audit market after Carillion crash - Reuters

 

FILE PHOTO: A view of the London skyline shows the City of London financial district, seen from St Paul's Cathedral in London, Britain February 25, 2017. REUTERS/Neil Hall/File Photo/File PhotoReuters

UK Audit Shake-Up Targets Big Firms After Spate of Corporate Failures

LONDON (Reuters) - Britain set out sweeping reforms of big company audits on Tuesday after high-profile collapses at builder Carillion and retailer BHS in recent years hit thousands of jobs and raised questions about accounting quality.

The business ministry detailed changes to auditing and corporate governance that will be put into law, though the measures are unlikely to come into force until 2024 or later and smaller firms will be shielded from the new rules.

The reforms are in response to 150 recommendations from three government-sponsored reviews on improving auditing in a market dominated by KPMG, EY, PwC and Deloitte, known as the Big Four.

The new law would create a more powerful regulator, the Audit, Reporting and Governance Authority (ARGA), to push through changes set out by government.

In the meantime, the current watchdog, the Financial Reporting Council (FRC), will have powers to vet audit companies and ban failing auditors, the ministry said.

Britain will also review a European Union definition of "micro entities", which benefit from simplified accounts. They typically have a balance sheet of no more than 350,000 euros ($377,230) and employ no more than 10 people.

Loosening the definition would mean more firms saving money by filing simplified accounts, though it could raise investor protection concerns. Other reporting requirements will also be reviewed to help attract growth companies to Britain.

The FRC currently focuses on big listed companies, but ARGA's remit would expand to include about 600 private firms with more than 750 staff and an annual turnover of over 750 million pounds ($949 million), a higher threshold than initially flagged. BHS was unlisted.

NO UK SARBANES-OXLEY

To curtail the dominance of the Big Four, the top 350 listed companies would have to appoint a non-Big Four accountant, or allocate a certain portion of their audit to a smaller accountant such as Mazars, BDO or Grant Thornton.

The business ministry could introduce market share caps on the Big Four if there is no improvement in competition.

Directors of premium listed companies would also have to state why they think their internal controls are effective.

This would be done under Britain's "comply or explain" corporate governance code, which the FRC can change without legislation.

UK companies pushed back against enshrining in law a version of mandatory U.S. Sarbanes-Oxley rules, which force U.S. directors to personally attest to the adequacy of internal controls, and face prison for breaches.

"Lessons from Carillion and other recent company failures have been ignored, with little emphasis now on tightening internal controls and modernising corporate governance," said Michael Izza, chief executive of ICAEW, a professional accounting body.

FRC chief Jon Thompson said: "The Government’s decision not to pursue the introduction of a version of the Sarbanes-Oxley reporting regime is, the FRC believes, a missed opportunity to improve internal controls in a proportionate, UK-specific manner."

Big firms would also have to state what external checks, if any, were made on the reliability of their non-financial information in annual reports, such as risks from climate change.

Larger companies would have to confirm the legality of their dividends, a lesson from Carillion. 

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Insight - The two sides of the EY break-up

 

For its part, EY is under particular pressure due to its auditing of collapsed German payments firm Wirecard AG – although it’s not clear that a break-up would rid it of any liabilities arising from that failure. Perhaps EY is preempting tougher regulation.Or perhaps it just sees an opportunity to monetise some of it assets.

  A possible split of EY into separate audit and consulting firms must confront the problem faced by all break-ups: How do you create attractive businesses out of both when one is likely to be seen as inferior?

Here, that would be the newly established standalone auditor. EY – or any Big Four accounting firm that attempts such a separation – has its work cut out to make pure-play audit a success.

The revelation by Michael West Media that EY is considering the move heralds a potentially seismic shift for the industry.

A succession of accounting scandals has long prompted attacks on the Big Four for earning fees from audit clients by selling consulting services such as strategy or restructuring advice.

There’s an inherent conflict of interest in offering these to the same executives whose homework you’re meant to be marking.

While regulatory scrutiny is forcing firms to tread carefully, creating distinct companies is the most reliable remedy.

The United Kingdom’s competition watchdog called for an “operational separation” of audit and consulting within the existing firms in 2019, stopping short of demanding full break-ups because of cost and complexity.

For its part, EY is under particular pressure due to its auditing of collapsed German payments firm Wirecard AG – although it’s not clear that a break-up would rid it of any liabilities arising from that failure.

Perhaps EY is preempting tougher regulation.

Or perhaps it just sees an opportunity to monetise some of it assets.

One option under consideration is the sale of a stake in the consulting business to a private buyer or to the stock market, creating a windfall for EY’s current partners, according to the Financial Times. Demand would likely be strong.

Just look at the private-equity money piling in lately. PwC sold a tax advisory practice to Clayton, Dubilier & Rice for a reported US$2.2bil (RM9.6bil) last year, while KPMG offloaded its UK restructuring arm to HIG Capital LLC.

But what about the rump that remains?

While the underlying economics of the Big Four are opaque, there’s a widespread suspicion that consulting subsidises audit.

At the very least, the ability to share costs means audit fees are lower than they would be for a distinct firm, regulators have found.

Retaining talent

The biggest challenge is how a standalone auditor would attract and retain talent without offering an in-house career in consulting as an option.

Short-sellers and forensic investigators aside, checking company accounts is for many a laborious gateway to other roles.

Audit partners accused of getting it wrong have regulatory probes hanging over them for years (an investigation into Rolls-Royce Holdings Plc’s 2010 accounts only just closed).

No wonder juniors tend to jump ship to better paid and less risky careers in consulting or investment banking not long after they’re qualified.

So auditing will have to be made more attractive, both financially and culturally.

One place to start is expanding the function beyond checking financial statements to offering sophisticated checks on companies’ claims on non-financial performance such as climate and social impact.

When the United States Securities and Exchange Commission is clamping down on greenwashing by investment funds, it’s clear the future of environmental, social and governance investing rests on companies proving they’re not cooking the books on these issues too.

These public-interest assessments are going to be increasingly scrutinised by investors in future.

They are already offered under the umbrella of so-called assurance services, but ought to become a more developed part of corporate reporting.

That would involve transferring some skills over from the consultancy side. The trick will be to add in parts of the current consulting business that are relevant to a more modern vision of audit, without just recreating a new auditor-cum-consultancy.

Of course, separation won’t eliminate all the conflicts in audit.

The chief culprit is the way managers often effectively appoint the audit partners who are meant to be their policemen.

But the prize for stock-market investors is improved audit quality, and a break-up could support that.

The goal should be to create a virtuous circle.

Make audit more enticing as a long-term career, attract people who do the work better – and hopefully cut the number of blow-ups. — Bloomberg

Chris Hughes is a Bloomberg Opinion columnist covering deals. The views expressed here are the writer’s own.

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