U.S. Audit Watchdog Optimistic on Ending China Standoff

U.S. regulators would be able to inspect audit work done in China under an agreement the Public Company Accounting Oversight Board expects to complete this year, Chairman James R. Doty said.

Any agreement would come amid increased interest by Chinese companies in listing on U.S. stock exchanges, Doty added. Eight Chinese companies had initial public offerings in the U.S. last year, up from three in 2012. Alibaba Group Holding Ltd., China’s largest e-commerce company, said in November that it’s deciding whether to sell shares in the U.S. or Hong Kong.

“This confirms the importance to us of staying or remaining in pursuit of some means of accessing those work papers of audits before they become enforcement files,” Doty said today at a Securities and Exchange Commission meeting to review the PCAOB’s 2014 budget.

The prospective accord would end a three-year standoff over the board’s inability to access work papers for audits of China-based firms listed in the U.S. Chinese affiliates of the four largest accounting firms were barred last month from leading audits of companies traded in the U.S. after failing to provide documents at the heart of a series of accounting fraud probes.

The firms said they planned to appeal the decision to the five commissioners. That appeal must be filed by Feb. 12.

Positive Development

Doty’s statement today won’t have any impact on that process, said Jason Flemmons, a former SEC accountant who is now a senior managing director at FTI Consulting Inc. Progress on resolving the dispute is a positive development, he said.

“It is a big and significant statement; it’s just hard to tell how it will be carried out,” Flemmons said. It sounds to me that there is more genuine desire on both sides to take the next step.’’

China-based auditors have argued they are caught between U.S. law, which requires them to turn over all documents requested by regulators, and Chinese law, which prohibits transferring data that might contain state secrets to foreign parties.

An agreement in May between the two countries allowed some cooperation, and U.S. regulators have received documents on at least four companies, China’s regulator said last month. That agreement didn’t allow for PCAOB inspections in China.

Access Compromise

A compromise could be struck by giving the PCAOB access to work papers or allowing it to meet with auditors outside China, Doty said.

“We can do a lot of things to try to deal with logistics, but we cannot compromise on whether we have the information and the access we need for an inspection,” he said. “It may be that we do not need to be on the ground.”

The PCAOB has exchanged drafts of agreements with Chinese officials that spell out how the U.S. watchdog would access audit documents and hopes to “make some progress” before the U.S.-China Strategic and Economic Dialogue scheduled for July.

Sending the dozens of boxes of papers out of China needed to review each audit may not be practical, FTI’s Flemmons said. “Given the volume of materials, I would expect that the bulk of the work would have to be done in-country,” he said.

Separately, the PCAOB is no longer considering a proposal to limit how long accounting firms can audit any one client, Doty said today. The concept, which the PCAOB said was intended to improve auditor independence, became a target of criticism and lobbying by large U.S. accounting firms that said it would hurt audit quality.

House lawmakers registered their disapproval in July by approving a bill that would forbid the PCAOB from requiring mandatory audit rotation.

“We don’t have an active project or work going on within the board to move forward on a term-limit for auditors,” Doty said.

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