U.S. regulators seeking greater access to audits of Chinese firms are pushing Beijing’s top securities watchdog to resume talks on cooperation, said James Doty, chairman of the Public Company Accounting Oversight Board.
Doty said he and Securities and Exchange Commission Chairman Mary Schapiro proposed the resumption in letters to Guo Shuqing, the new chief of the China Securities Regulatory Commission, after the Chinese canceled U.S. meetings to discuss joint inspections of auditors in both countries. Doty’s letter reminded Guo about “the need to do it,” the PCAOB chief said in an interview yesterday.
“A globalized marketplace only works if regulators are willing and legally able to assist one another in policing compliance,” Schapiro said in a statement today. It’s “critical” for the SEC and PCAOB to quickly settle cross- border enforcement and inspections with China, she said.
Investors in U.S.-traded Chinese firms have lost almost $10 billion in share value this year as at least two dozen firms -- including Heli Electronics Corp. (HELI) and China-Biotics Inc. (CHBT) -- revealed accounting flaws or auditor resignations. The PCAOB, a nonprofit corporation that is legally required to inspect auditors of such companies wherever they are based, has yet to reach an agreement with China, the world’s fastest-growing economy.
U.S. regulators traveled to China in July for a meeting that was supposed to be followed by a visit from Chinese officials. The U.S. meeting was canceled last month, Doty said.
“The next set of meetings has to result in some kind of protocol that enables us to share information and do the inspections,” Doty said. “We need to have an accord -- a statement of protocol -- so that inspections can be scheduled and commence in 2012.”
The PCAOB’s latest public list of China-based companies whose audits are unavailable includes 143 firms working with 10 auditors. Chinese officials have expressed concern that U.S. inspections could reveal state secrets, according to Doty.
“We can’t simply pretend that China is different,” he said. “You can’t come sell your securities here and ignore the fact that the law requires and people want to know that the auditor’s been inspected.”
The board, which was created by the Sarbanes-Oxley Act of 2002 after accounting scandals contributed to the collapses of Enron Corp. and WorldCom Inc., has authority to de-register China-based auditors, which could start a chain reaction leading to companies being unable to list on U.S. exchanges.
“We don’t know that we’ll have to do it,” Doty said, adding that it’s in both nations’ best interests to come up with joint inspections. “There isn’t any reason that we can see why that can’t be achieved,” he said.
U.S. Senator Chuck Schumer, a New York Democrat who serves on the Banking and Finance committees, wrote a letter to Doty yesterday advising him to address the PCAOB’s six years of “continued failure” to inspect in China.
“Years of discussions with the Chinese government generally fail to produce meaningful results,” Schumer wrote in the letter, recommending immediate disciplinary action to revoke Chinese auditors’ registrations.
Schumer’s letter “should be taken seriously by our counterparts overseas,” Doty said. “It indicates the importance of coming to some arrangement on joint inspections.”