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China Tells Domestic Companies to Favor Chinese Auditors

China has told domestic companies that they should give priority to using Chinese accounting firms to safeguard the country’s “economic information.”

Companies listed overseas, those involved in finance, energy, communications and military industries as well as large state-owned companies involved in “people’s livelihood” should choose large domestic auditors, the Ministry of Finance said in a notice posted on its website yesterday and dated June 16.

The U.S. has increased its scrutiny over Chinese companies listed in the country after short sellers said companies including Longtop Financial Technologies Ltd. and Sino-Forest Corp. were exaggerating operations. The Public Company Accounting Oversight Board in Washington rejected Hong Kong-based Zhonglei CPA Co.’s application to become a U.S. auditor on June 10, citing an inability to inspect its work for companies based in China. It was the first time the PCAOB blocked an auditor since toughening rules in October.

Longtop Financial, a maker of banking and insurance software said on May 23 that Deloitte Touche Tohmatsu CPA Ltd. resigned as its auditor after finding falsehoods in the company’s financial records.

PetroChina Co., the world’s third-biggest company by market value, and Industrial & Commercial Bank of China Ltd., the world’s biggest lender, are listed in Hong Kong and are among companies controlled by the central government. PetroChina’s auditor is PricewaterhouseCoopers LLP and ICBC’s auditor is Ernst & Young LLP, according to the companies’ 2010 annual reports.

Strengthen Protection

Other state-owned companies listed overseas include China Mobile Ltd., Aluminum Corp. of China Ltd. and Air China Ltd.

Last year, China’s State-Owned Assets Supervision and Administration, which oversees more than 100 companies controlled by the central government, told state-owned enterprises to strengthen protection of their commercial secrets, which include information about strategic planning, management, public listings, business models, property transactions, financial information and manufacturing processes.

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