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.”
I don’t expect the State Council will reject the PCAOB proposal for joint regulation of Chinese auditors. I expect they do nothing. That means it will be up to the PCAOB to decide when things have been strung on for too long. It seems to me that that time is rapidly approaching.
The PCAOB has two ways to deal with the end game. It could propose to change its rules, deregistering all firms that it cannot inspect. Or it could begin disciplinary action against each of the firms individually. I hope it chooses the former. Individual disciplinary action will take place out of public view. The PCAOB cannot disclose disciplinary actions until they are final. Investors need to know what is going on and have input in the deregistration process.
There will be a hearing in Washington next week by the U.S.-China Security and Economic Commission on these issues. The Commission was set up by Congress to monitor, investigate and report on the national security implications of the U.S.-China bilateral trade and economic relationship. The hearing is on Thursday, March 7, at 9 AM in Room 582 in the Dirksen Senate Office Building. I will be testifying in the morning session.