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PCAOB Warns China Patience is Wearing Thin

Tammy Whitehouse | June 19, 2012

U.S. audit regulators are giving their Chinese counterparts a deadline. Unresolved disciplinary issues involving China-based audit firms hinge on the United States gaining regulatory access by the end of the year to Chinese-based firms operating in the United States.

Lewis Ferguson, a member of the Public Company Accounting Oversight Board, said in a speech at a Shanghai conference that the board is sitting on pending enforcement actions, incomplete inspections, and unresolved registration requests as it awaits word from Chinese authorities on how the two countries can cooperate on regulating firms within each jurisdiction. “While the Board has made no decision about how to proceed in any of these pending registration, inspections, or enforcement matters, I believe it is fair to say that how we proceed will depend in substantial part on whether we can make real progress toward a cooperative oversight agreement with regulators during the balance of this year,” he said.

Ferguson, who prefaced his remarks with the usual disclaimer that he doesn't speak for the entire board, is barred by the board's rules from discussing pending enforcement actions. The most noteworthy enforcement action from the Securities and Exchange Commission is a standoff with Deloitte over audit work papers related to accounting issues at Longtop Financial Technologies. On the registration front, however, Ferguson said the PCAOB is holding registration applications for eight firms in China and six in Hong Kong that want to do business in the United States. The board determined in 2010 that it would not register any new firms from those jurisdictions without written agreement from local regulators to consent to the PCAOB's inspection process. “Since that time, no China or Hong Kong-based firms have been registered with the PCAOB,” he said, suggesting regulators have not agreed to the terms.

Initial public offerings also “slowed to a trickle,” said Ferguson, when scrutiny of China-based companies heightened following the discovery of serious accounting issues in the past year or so. In the United States, 67 China-based issuers have seen auditors resign and 126 issuers have been delisted or have “gone dark,” he said, meaning they quit filing financial reports with the Securities and Exchange Commission.

Still, the PCAOB has 48-China-based firms under its watch and 56 based in Hong Kong that are doing business in the United States but remain inaccessible to the board. “Both we and the Chinese regulators recognize the importance of improving audit quality and investor protection,” he said. “The question is how to achieve that in ways that respect the national sovereignty and the legitimate regulatory goals of both countries.”

The PCAOB is trying to smooth the way by proposing each country observe the other's inspection and regulatory processes at work. PCAOB Chairman James Doty has said the board is hopeful it will strike an agreement along those lines soon so that observation could begin by the end of the year. Initially observations would focus on audit firms' quality control activities then eventually on the inspection of audit engagements, Ferguson said. “We hope such exercises will build trust and lead to further cooperation,” he said.