Advanced Battery Technologies (NASDAQ: ABAT) was delisted by NASDAQ on November 30, joining a long list of Chinese companies delisted by NYSE and NASDAQ this year. No news there, but there is an interesting story in the coup de grâce.
NASDAQ had requested that the company do a special audit of its cash accounts, requiring the auditors to physically visit the bank and to observe the completion of the confirmations. ABAT Chairman Zhiguo Fu was infuriated by the request, writing in a letter to his shareholders:
"At the end of the summer, however, as stories circulated regarding collusion between a small number of Chinese companies and their bankers, NASDAQ decided that, solely because we are Chinese, we should be required to provide an extraordinary level of confirmation from our banks. Despite the lack of any evidence of wrong-doing on our part, NASDAQ insisted that we approach our banks, inform them that our U.S. regulators consider them untrustworthy, and ask them to permit our auditors to "look over their shoulders," as it were, while they prepare bank confirmations. Initially NASDAQ insisted that this degrading procedure be conducted at the highest level of the bank. After we obtained written refusals from each of our banks, NASDAQ agreed to have the process carried out at our local bank branches."
There was an interesting article by Yi Peng in the Chinese edition of the 21st Century Business Herald. It does not appear on the English website. The article reports on the ongoing standoff between U.S. and Chinese regulators on U.S. listed Chinese stocks. There is some information in this article that I have not seen in any Western reports.
The article suggests that the Chinese side of the dialogue between the U.S. and China is mostly playing out in carefully worded press releases, with some public comments at the U.S. China Strategic Dialogue. I suppose the 21st Century article may be part of that process.
The sense I get from the article is that China wants to provide specific information to the PCAOB based on document requests that it can vet for state secrecy issues, while the PCAOB wants to come and do joint inspections. The Chinese approach is unworkable. It is not practical to do an inspection of an audit without access to the full audit working papers. The deficiencies in a audit will be discovered more because of what is not in the working papers, rather than through an examination of what is there. That is, deficiencies in audit quality often relate to the failure to do the steps necessary to verify a particular balance, not from doing the steps incorrectly.
The PCAOB had a public meeting on November 30th where it approved its 2011-2015 strategic plan and 2012 fiscal-year budget. The budget now moves to the SEC for its consideration.
The total PCAOB budget is proposed to increase by 11.4% to $227.7 million. Two major drivers of the increased budget are new examinations related to broker dealers that were required by the Dodd-Frank Act and increased international inspection activity.
The PCAOB plans to increase the number of international inspections from 43 in 2011 to 90 in 2012. Of those 90 international inspections, 65 will be of foreign offices of the large global network firms such as the Big Four, and 25 will be of smaller firms.
The Board is hopeful that it will be able to begin inspections in China and Hong Kong during 2012. These inspections have been held up by China's argument that they would infringe on China's sovereignty. If an agreement can be reached for inspections to begin, the PCAOB has budgeted for two inspections to be done on the mainland in 2012 and for the completion of five inspections in Hong Kong that were suspended after China asserted sovereignty.
The proposal would require firms to separate their consulting businesses. While three of the Big Four (excluding Deloitte) disposed of their consulting businesses in the wake of Sarbanes/Oxley, they have all started them up again as the noncompete agreements with the buyers expired. By 2009, tax services totalled 24% of Big Four global revenue and advisory services totalled 28% - in sum 52% of the Big Four global revenue.
The proposal would create pure audit firms and require the firms to spin off or sell the consulting practices. While the rules would only apply in the EU, they likely have global implications. Because most Big Four clients seek globally integrated services, the firms are likely to be pressured by the market into creating separate consulting firms in other countries - in particular the important markets of the U.S. and China.