China Reaches Deal With U.S. Audit Regulators
May 27 – The U.S. Public Company Accounting Oversight Board (PCAOB) and the Chinese Securities Regulatory Commission (CSRC) have reached a deal that will allow greater oversight by U.S. financial regulators of Chinese companies listed on American stock exchanges. The agreement was reached through a memorandum of understanding (MoU) that gives the PCAOB access to financial audit documents for China-based companies listed in the U.S. under investigation for fraud.
“This agreement with China is an important step toward cross-border enforcement cooperation that is necessary to protect the interests of investors in U.S. capital markets,” said James Doty, Chairman of the PCAOB.
It has been estimated that due to accounting scandals investors have lost billions of dollars on Chinese companies who sell shares on American stock exchanges. While many of the accused companies have been removed from the exchanges, there are still hundreds trading in the United States.
This new agreement will do much to address the current China-U.S. audit oversight.
According to the MoU, China has agreed to give PCAOB regulators access to auditors’ financial records for companies being investigated under charges of fraud. The PCAOB would then be allowed to pass the reports on to the U.S. Securities and Exchange Commission for potential sanctions, and in extreme cases, de-listing from American stock exchanges.
China, however, will retain the right to reject such requests if they violate local laws or harm essential national interests. Currently, Chinese laws do not allow Chinese companies listed overseas to send audit papers to overseas institutions or individuals without approval from the relevant authorities.
Due to this fact, it is worried that the scope of the agreement may be limited. Furthermore, the agreement only applies to enforcement cases against auditors, and not to Chinese companies who are suspected of accounting fraud. In addition, U.S. financial regulators will still be blocked from performing on-site inspections of auditors in China.
Nevertheless, the successful conclusion to the agreement is the first sign of progress for increased cooperation between the two countries’ regulatory bodies. The agreement comes after several years of strained relations between the U.S. and Chinese financial regulators and the auditing companies that serve as intermediaries for Chinese companies who raise capital in the United States.
The CSRC and China’s Ministry of Finance will continue to work with the PCAOB to discuss how to better supervise Chinese accounting firms that provide auditing services to U.S.-listed Chinese companies in a way that is acceptable to both sides.
While the agreement does not resolve every issue surrounding the transparency of Chinese audit records, both U.S. and Chinese officials are satisfied that progress has been made after a longstanding gridlock.
“This is a step in the interests of protecting investors,” said Chairman Doty.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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