Risk of Chinese auditors | China Accounting Blog | Paul Gillis

Risk of Chinese auditors

The SEC has told many U.S. listed Chinese companies that they must disclose the risk associated with the inability of the PCAOB to inspect the work of their auditors in China.  These disclosures are now beginning to appear in the Form 20F filings for the year ended December 31, 2011. Here is an example from the recent filing by 51Job, Inc:

The Public Company Accounting Oversight Board, a U.S. regulator which oversees the inspections of audit firms which conduct audits of registrants which file financial statements with the SEC, is currently unable, due to governmental and political factors, to inspect the audit work and practices of registered audit firms in China.

Public company auditors are required by law to undergo regular Public Company Accounting Oversight Board, or PCAOB, inspections to assess their compliance with U.S. law and professional standards in connection with their audits of public company financial statements filed with the SEC. Because our auditor is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, the audit work and practices of our auditor, like other registered audit firms operating in China, is currently not inspected by the PCAOB, due to various governmental and political factors. As a result, investors in U.S. markets who rely on audit reports from any Chinese audit firm are not able to factor the publicly reported findings of regular recurring PCAOB inspections of audit firms and their quality control practices into their decision making processes.

Any investor who actually reads these disclosures probably already knows the risks of using companies with Chinese auditors. China is only one of 19 jurisdictions that currently block PCAOB inspections. I looked at several French companies listed on U.S. exchanges and the risk disclosure above was not present. The SEC should be consistent and require the disclosure for all companies where the inspection of the auditor is not permitted, not just the Chinese ones.

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