It has been two months since the CSRC and MOF sent a recommendation to the State Council on audit regulation and nothing has happened. While I hope I am wrong, I don’t think the State Council is going to do anything.
The PCAOB is beginning to stir. James Doty gave an interview to Knowledge at Wharton:
“If the Chinese authorities continue to put up obstacles to legally required inspections of firms that have chosen to register in the U.S., the PCAOB will have to reevaluate the status of those firms in our system,” he stated. If the PCAOB can’t inspect auditors of U.S.-listed companies, by law, it has to deregister those auditors. That, in turn, may well lead to deregistration from U.S. exchanges of companies that employ those auditors, including the China-based affiliates of many U.S. and multinational companies. “We are mindful of the potential consequences,” said Doty. “The PCAOB will work to find the least disruptive solution. Any action the Board takes will be a result of thorough and thoughtful deliberation. But ultimately, our charge is to implement and enforce policy decisions embedded in U.S. law to protect the interests of investors in quality audits.”
We have had signals over the past few weeks that negotiations are continuing in the standoff between U.S. and Chinese regulators. There was an article in the Chinese press reporting that a proposal for cooperation had been sent to the State Council by the CSRC and the MOF.
Friday, PCAOB member Jeanette Franzel said during a conference at Baruch College that the PCAOB and SEC are making progress on negotiating a memorandum of understanding with the Chinese government.
Some of Franzel’s comments were reported by Accounting Today:
“Unfortunately we have seen a lot of fraudulent activities in those companies, and beginning in 2010 and since then, about 67 of those companies have had their auditors actually resign, and 126 of those issuers have either been delisted from the U.S. exchanges, or they’ve gone dark and are no longer tapping into capital,” said Franzel. “We don’t know how many more are out there and may need to remove themselves from the U.S. markets. Both we and the SEC are trying to negotiate with the Chinese government right now. We’ve been negotiating for quite some time, so there could be some more out there. It is a serious issue for investors who have invested in these companies if we and the SEC do not have oversight, so we continue to work on that.”