China-US auditing disputes near resolution

Years of disputes over demands by United States regulators for access to audit papers of US-listed Chinese companies could draw to an end as early as this year because of a possible deal between the two countries, said a US official.

Jim Doty, chairman of the Public Company Accounting Oversight Board, the top US audit watchdog, said he is optimistic the two sides will be able, during 2014, to sign a long-sought agreement to inspect the audit work of firms registered with it but based in China.

Doty made the remarks on Wednesday while testifying before the Securities and Exchange Commission, the US securities regulator, Reuters reported.

He said the Chinese regulator and the Public Company Accounting Oversight Board are still exchanging draft agreements and have not yet decided how the inspections would be conducted. Because Chinese negotiators are reluctant for the inspections to be conducted on Chinese soil, the papers might have to be moved to a foreign territory for inspection.

But Tao Jingzhou, managing partner of Dechert LLP's Asian practice, said "conducting the inspections on Chinese soil by a foreign examiner is delicate but doable".

"One should recall that both European Union officials and the US International Trade Commission have conducted their on-the-spot investigations of Chinese firms in the anti-dumping cases in the past. I do not think there is any sovereign issue at stake," Tao said.

"It is very desirable for the 'Big Four' (accountancy firms) and especially for companies that China and the PCAOB can cut a deal quickly," he said.

Zhao Deming, a Shanghai-based lawyer with Haoliwen Partners, said such an agreement would reveal potential defects with some US-listed Chinese companies, but it would be good news for high-quality Chinese companies wanting to be listed in the US.

He also pointed out that the inspection should be carried out within Chinese secrecy laws. Furthermore, finalizing any deal still depends on the attitude of the Chinese government towards overseas listings.

Shares of Chinese companies listed on the US market generally rallied on Thursday with eight stocks rising by more than 5 percent, led by online marketplace 58.com, which rocketed nearly 15 percent.

For years, US regulators have been seeking to gain access to work papers at audit firms in China, including units of the "Big Four" firms, amid a rash of accounting scandals at US-listed China-based companies.

But these firms — PricewaterhouseCoopers, KPMG, Deloitte Touche Tohmatsu Ltd and Ernst & Young — among other accounting firms have refused to share any paperwork, citing Chinese secrecy laws.

The disputes escalated in January when a judge with the US Securities and Exchange Commission decided to suspend the Chinese units of the Big Four from operating in the United States for six months, before the accounting firms issued a joint statement saying they intended to appeal against the ruling.

Observers said the ruling could have negative effects for US-listed China companies, which might need to find new auditors. In a potential broadening of the issue, the ruling could also affect the US-listed Chinese companies using a Hong Kong unit of a Big Four auditor, because the bulk of the audit work is outsourced to their respective affiliates on the mainland.

In the meantime, Zhao said, it could give Hong Kong an advantage over the US as a potential market for Chinese companies wanting to get listed overseas.

Bao Fan, chief executive officer of China Renaissance Capital Investment Inc, was quoted by as saying the Chinese regulator should lower the threshold for domestic investors to make the Chinese market a better place for initial public offerings by Chinese hi-tech companies.

He said undervalued US-listed Chinese companies that don't desire a share in the overseas market should consider privatizing their shares — and now would be a good moment.