US and China Sign Accord Regarding Accounting Records Standoff
We are pleased to report the U.S. Public Company Accounting Oversight Board (PCAOB) announced an accord with the Chinese Securities Regulatory Commission which enables access to audit work papers and documents heretofore retained by Chinese auditors. This relieves some immediate pressure in the dispute between the US SEC and China regarding investigative rights across country lines.
A memorandum of understanding with the CSRC and the China Ministry of Finance will allow US and Chinese regulators to request and help each other to obtain documents needed during investigations. This opens the door for US regulators to check records of US-listed China-based companies which have been threatened to be delisted. The United States require public companies to use approved auditors, conform to international standards and allow access to records if the companies want to trade on US exchanges.
The stand-off between the two governments resulted from arguments about scandals related to China-based US-listed companies under investigation by the US SEC. When the SEC requested access to auditors work papers, major accounting firms with offices in China refused to turn over the records because such records are protected under Chinese laws of national sovereignty. Delivery of the records is punishable by prison sentences. On the other side, the US SEC filed legal action against the Big Four accounting firms for failure to comply and compromised their potential to work with clients on the US exchange. Global accounting firms working with China-based US listed companies have been in a squeeze since this faceoff erupted. The SEC and the auditors are still in court for cases related to probes of Chinese companies under suspicion of accounting fraud. If the SEC wins, the local affiliates can lose their right to audit US-listed firms, including those of their Chinese clients.
Since the face-off, more than 126 of the China companies have been delisted from the US exchange. Investors lost billions of dollars during the sell-off which followed.
The MOU does not address the PCAOB’s original request to inspect Chinese companies’ accounting records held within China. Until Last week, China denied all US requests for Chinese companies accounting records as violations of national sovereignty.
“The MOU will let the PCAOB share China documents with the SEC if Chinese officials receive advance notice” stated James Doty, PCAOB chairman [Investor’s Business Daily citation].
“This has been an expensive and painful dilemma for all parties. The first step is always the toughest in breaking through an impass like this, ” notes Donna Hamlin, CEO of Intrabond Capital, U.S. Inc. “ Let us hope talks will continue about the option for joint inspections in China of PCAOB-registered auditors, auditing of US-listed Chinese companies and actions to improve governance performance for all our sake.”
For a detailed history of the issue, click here:http://www.ecch.com/educators/products/view?id=112684
Corporate Governance in a Global World: Explosive Board Challenge when National Standards Conflict
by Dr. Donna Hamlin.