US watchdog says it is close to deal to inspect audit work of Chinese accounting firms

PUBLISHED : Thursday, 06 February, 2014, 3:22pm
UPDATED : Friday, 07 February, 2014, 4:36am

The top United States audit watchdog said that the US and China are close to striking a deal that would allow Washington to inspect the audit work of mainland accounting firms.

Such a deal would alleviate a long-running dispute between the two global powers regarding oversight of auditors, an issue aggravated by a series of accounting scandals in recent years at US-listed Chinese companies.

The US escalated the stand-off last month when a judge moved to temporarily suspend the mainland units of the "Big Four" accounting firms from practising in the US. It has been unclear how that move would impact negotiations for a broader solution.

"I am also optimistic that we will be able, during 2014, to sign a long-sought agreement to inspect the audit work of PCAOB-registered firms based in China," Jim Doty, the chairman of the Public Company Accounting Oversight Board, said on Wednesday.

The topic of China came up as part of a hearing before the US Securities and Exchange Commission to discuss the board's budget and policy initiatives for this year.

Doty said later that Chinese negotiators and the board were still exchanging draft agreements and had not decided how the inspections would be conducted.

Throughout the talks, the Chinese negotiators have said they would not be comfortable with US examiners conducting the inspections on Chinese soil.

"Without commenting on what we think we are going to get, there are various ways of dealing with that, including moving the papers, making people available outside China, conducting inspections through other means," Doty said. "It may be that we do not necessarily need to be on the ground."

He also struck a serious tone about the need to reach an agreement soon. "Patience is limited for getting this solved," Doty said. "This is the end of the line."

The oversight board and the SEC have been struggling for years to gain access to work papers at audit firms on the mainland, including units of KPMG, PricewaterhouseCoopers, Deloitte and Ernst & Young, amid a burst of accounting scandals. The scandals have affected dozens of Chinese companies traded on US exchanges, many of which were later delisted or deregistered.

Doty estimated that more than 50 auditors had resigned after accounting problems surfaced at those companies.

The SEC has sued some of the questionable Chinese companies, but it has complained that many of its investigations were thwarted by the mainland units of US accounting firms and others who refused to share their audit work because they said doing so would violate mainland secrecy laws.

The SEC and the board contend access to the work is crucial, both for investigating wrongdoing, and also to police the quality of audit work through routine inspections.

The SEC eventually hit an impasse during talks with Chinese negotiators and filed an enforcement action against the mainland units of the Big Four in late 2012, saying they were violating US laws by failing to hand over the audit work papers.

The board has continued talks with the Chinese and in May was able to strike a deal to get access to audit work in connection with investigations.

That deal, however, did not give the board the ability to conduct routine inspections of the audit firms - a key responsibility to ensure the quality of the work.

Last month, the SEC prevailed in its case against the Big Four, after an SEC administrative law judge sided with the agency and ruled the audit firms were intentionally withholding documents. The judge suspended the firms from practicing in the US for six months, but the suspensions will not go into effect until the appeals process is exhausted.

If a deal falls through, it could lead the board to deregister mainland audit firms.