Thomas Shoesmith of Pillsbury has an interesting analysis of the PCAOB’s December 31 deadline to complete inspections. Here is what Shoesmith says:
The PCAOB is facing a December 31 deadline to complete its international inspections—including inspections of Chinese accounting firms. The deadline has been extended once before, from December 31, 2009. If it is not extended again, or if the regulators don’t work out a compromise, on January 1, there will be no PCAOB-registered Chinese accounting firms.
I don’t agree with his conclusion. I have been saying that I expect the PCAOB to act before this deadline passes, but by means of a rulemaking change that begins the process of deregistration. If this does not happen today, however, the holiday schedule makes it unlikely that the PCAOB will do anything before December 31. I don’t think the passing of this deadline will automatically result in the deregistration of the firms, but it will put the PCAOB out of compliance with its own rules.
If the PCAOB does not act in the coming days, I think it will be because negotiations with China are bearing fruit. From the experience of the SEC, however, we have learned that actually concluding a deal is quite difficult. I would expect that the major hang-up with a deal will not be over joint inspections, but on whether the PCAOB can punish firms that are found deficient. PRC regulators would not allow this with Hong Kong regulators when they negotiated access for mainland accountants to audit H shares, and it seems it would be difficult for them to agree to allow U.S. regulators the right to punish Chinese firms. The PCAOB would always have the nuclear option – to deregister firms, but that is too severe a penalty and too unlikely to be used to have the desired effect of encouraging firms to up their audit game.
Shoesmith also discusses the risk to multinationals. As I have previously written, the rule is a bit more complex than he illustrates. I believe that few, if any, MNCs will have a problem if the China accounting firms are deregistered.
Update: Thomas Shoesmith has an updated post that I agree with.