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Postings

Solving regulatory battles

It has been very quiet the past couple of months on the confrontation between the PCAOB/SEC and Chinese regulators over audit working papers and inspections for U.S. listed Chinese companies and their auditors.

The issues were coming to a head in early July. The SEC case against the Big Four and BDO went to a hearing before the administrative trial judge of the SEC on July 9 and the standoff between U.S. and Chinese regulators was on the agenda of the Strategic and Economic Dialogue (SED) between the United States and China that was scheduled that same week in Washingtion.

Chinese regulators blinked first in the standoff. CSRC told the SEC they would turn over 20 boxes of working papers related to Longtop Financial Technologies provided the SEC sent them money for postage. Treasury Secretary Jack Lew announced the breakthrough at the SED. No agreement was reached at the SED on access to conduct audit inspections by the PCAOB.

The PCAOB had earlier reached agreement to share documents with Chinese regulators in connection with investigations, but reached no agreement on inspections. Investigations are a small part of the PCAOB mission; inspections are its main function.

SFC v Ernst & Young

All has been quiet on the U.S. front with respect to the SEC’s case against the Big Four and BDO over turning over working papers. Ernst & Young (E&Y) were in court in Hong Kong on Thursday to make final arguments on their failure to turn over the working papers for Standard Water to the Securities and Futures Commission (SFC).

Ernst & Young seems to keep opening up cans of worms in this case. It is the Hong Kong affiliate of E&Y that the SFC has dragged into court because that is the firm that was the accountant of record. E&Y had to make the embarrassing admission that it did not have any working papers because it didn’t actually do the audit. The audit was done by E&Y Hua Ming, its mainland affiliate who refused to turn over the working papers because China won’t allow it. E&Y Hong Kong has not explained how it can be the signing accountant when it does not do audits. The Big Four in China have often overlooked the principal auditor rule that requires the audit firm that does most of the work to sign the report. The problem in Hong Kong is that the Exchange requires a Hong Kong accountant to sign most red chips, and the Big Four have ignored their legal structure and the way they do audits to accommodate this requirement.

Remarks at the China Best Ideas Conference

I gave an address to CEOs at the China Best Ideas Conference today. There are over 400 people, both investors and executives from Chinese companies at the conference. There is optimism that the U.S. markets might reopen for Chinese companies soon.

Remarks by Professor Paul Gillis at China Best Ideas Investment Conference, September 9, 2013.

Thank you.

Chinese entrepreneurs have had tough time getting capital. The shadow banking system is collapsing, the Chinese A share market is closed, private equity money has dried up, and U.S. exchanges are all but closed.

I am going to talk about the three things that have really hurt this market. I call them the three terrors of investors in Chinese stocks. I am hopeful that we are going to going to come to terms with these issues and that the markets are going to soon recover.

Accounting frauds

I don’t have to tell you that we have had a lot of accounting fraud among Chinese public companies. Over 150 cases in just the last few years. A lot of investors were wiped out. McKinsey says that investors in U.S. listed Chinese companies lost 72% of their investment in the last two years.

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