PCAOB's Doty on China | China Accounting Blog | Paul Gillis

PCAOB's Doty on China

PCAOB Chairman James Doty spoke at an audit conference at Baruch College in New York on Thursday. The PCAOB has not released a transcript of his remarks, but Michael Cohn of Accounting Today has reported on them. Doty’s reported comments on China are interesting:

Doty also discussed the PCAOB’s efforts to conduct inspections of auditing abroad, including China. He noted that to date the PCAOB has conducted inspections in nearly 40 foreign jurisdictions, and one-quarter of their scheduled inspections are outside the U.S. The PCAOB has also entered into bilateral cooperative agreements with regulators in 14 other jurisdictions to conduct inspections jointly with the local regulator. However, China remains a problem. “I am disappointed that we still face resistance from some countries where there are registered firms we are required to inspect,” he said. “Since October 2010, we have not approved any applications for registration submitted by firms in jurisdictions that resist inspections. I am encouraged that Chinese authorities are at least continuing to talk with us about ways we might work together. We were invited to observe an inspection by Chinese authorities earlier this year. The exercise was helpful. It was educational, and it began to build working relationships among staff. But we have not been allowed to inspect any Chinese firms that are registered with us, notwithstanding the fact that those firms continue to issue audit reports that are filed with the SEC and relied on by U.S. investors.

“The current state is not sustainable,” he added. “We are coming to a crossroads where we will have to make some important decisions about how best to protect investors.”

He was asked by a Baruch College student if pushing the Chinese too hard might have negative political consequences, but he responded that it would be a miscalculation for a foreign firm to take that attitude. “No jurisdiction should think that we will not act because the political consequences are too great,” he said. “Congress can tell us that. The White House can tell us that. The one thing that the Supreme Court decision about FEF vs. PCAOB decided was that we are part of the executive branch and we’re subject to oversight by the White House, like the Treasury Department, and they can tell us to stop or pause.

“At some point we must inspect as part of our statutory duty,” he added. “Countries that are barring us on the grounds of national public policy, secrecy, whatever, should not count on political practices or politics to continue that situation. The firms, by the way, have gotten themselves into a pickle. The firms have rushed into China because it is an important market, and I really do understand the toughness of that situation.”

My interpretation of Chairman Doty's comments is that the upcoming December meeting between U.S. and Chinese regulators is the crossroads, and if no significant progress is made the PCAOB is going to move to deregister Chinese accounting firms that it cannot inspect. That is likely to be a lengthy process, starting with a rule-making action, followed by public comment, and concluding with SEC approval. Doty introduces a new twist - the view that the White House or Congress could intervene in the process.  

Romney’s get tough talk about China likely would have led to a Romney White House cheering on moves to deregister Chinese accounting firms. The reaction of the Obama White House will probably be more nuanced. Deregistering Chinese accounting firms leads to delisting Chinese companies from U.S. exchanges. That will significantly damage the role of U.S. capital markets in the world. Yet, carving out an exception to U.S. securities laws for Chinese companies is equally unattractive.  

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