China v. SEC

December 12, 2012

There’s a fascinating battle going on between US and Chinese regulators over auditing standards. The best summary I’ve seen comes from Patrick Chonavec and includes:

China and the United States are on a collision course — over accounting. Last week, the U.S. Securities and Exchange Commission (SEC) charged the Chinese affiliates of the world’s top five accounting firms with violating securities laws for refusing to hand over information on suspect Chinese companies to investigators. The move is the latest, most dramatic step in an escalating standoff that could easily lead to a financial version of Armageddon: the forcible (and unprecedented) delisting of all Chinese shares currently traded on U.S. exchanges.  …

The problem is that the Chinese regulator … refuses to allow the board to inspect the U.S.-registered, China-based auditors, as required by Sarbanes-Oxley. … [T]he SEC has launched fraud investigations into several U.S.-listed Chinese companies and their executives, ordering their China-based auditors to hand over confidential documents to examine for potential evidence of wrongdoing. … Deloitte claimed that Chinese regulators had issued an extraordinary threat, telling auditors that handing over audit work papers would violate China’s (vague and draconian) State Secrets law, allowing China to “dissolve the firm entirely and to seek prison sentences up to life in prison for any [Deloitte] partners and employees who participated in the violation.”

Lots of additional information here from Paul Gillis.

It’s a tough one. On the one hand, you can understand China’s concern about having foreign regulators encroach on its turf. On the other, Chinese firms can hardly expect to have access to US markets without something close to US auditing standards, esp when there’s credible evidence of fraud.

Update (Jan 27 2013):  Good summary posted by Paul Gillis.

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