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JUL 11, 2013 By Michael Rapoport, Dinny McMahon
BEIJING—China’s securities regulator is preparing to hand over the audit documents of a U.S.-listed Chinese company to the U.S. Securities and Exchange Commission, the first move by Beijing to make good on a long-awaited agreement allowing the U.S. better oversight of Chinese firms that tap U.S. investors.
Shanghai Securities News, a state-run newspaper, reported Tuesday that the China Securities Regulatory Commission had notified the U.S. it was preparing to hand over the audit working papers of one company to the SEC and the Public Company Accounting Oversight Board. It didn’t name the company or specify the documents involved.
A media representative for the CSRC confirmed the report was correct, without going into more detail.
In recent years more than 100 Chinese companies traded on U.S. exchanges have encountered questions about their accounting and disclosure practices from regulators, auditors and short-sellers, resulting in shareholders losing billions of dollars as stock prices plunged. However, the SEC has been limited in its ability to investigate alleged abuses because Beijing has declined to allow China-based auditors to hand over documents for the U.S. regulator to review.
In May the CSRC and China’s Ministry of Finance agreed to allow the PCAOB, which regulates the U.S. audit industry, to see work papers and other records held by Chinese audit firms, in a first concession by Beijing. The SEC wasn’t a party to the May agreement—the PCAOB is allowed to share any documents it obtains with the SEC as long as it gives the Chinese advance notice—but Tuesday’s article suggests China’s regulators may be willing to make greater concessions than first agreed upon.
The SEC has contended the Chinese should hand over audit documents under a 2002 agreement for international cooperation among securities regulators that both the SEC and the CSRC have signed.
Most Chinese companies listed on the New York Stock Exchange or Nasdaq Stock Market are audited by the local Chinese operations of foreign firms, including the big four global accounting firms—PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young.
A senior executive at one of the big four firms said his firm has recently received a number of inquiries from the CSRC for documents relating to old cases involving U.S.-listed companies, in what appeared to be a move by the regulator to cooperate under the May agreement. He didn’t say what companies had been singled out.
U.S. regulators will be looking to see how much the documents help them in their investigations. The regulators have long been frustrated by China-based audit firms’ refusal to turn over documents about their clients. The audit firms say Chinese law treats such documents as akin to state secrets and that they could be subject to harsh penalties if they help U.S. regulators without the Chinese government’s blessing.
The two sides have been wrangling over the issue for nearly two years. In September 2011 the SEC filed an enforcement action against Deloitte for failing to produce documents relating to the SEC’s investigation of Longtop Financial Technologies Ltd., a company based in the Chinese city of Xiamen. Following a spate of short-seller reports earlier that year accusing Longtop of exaggerating the size of its business, Deloitte resigned as auditor, saying it could no longer rely on the company’s disclosures.
The SEC has said it tried but failed to resolve the problem of access to documents with Chinese regulators, and in December it filed administrative charges against the Chinese affiliates of five major accounting firms, alleging they had violated U.S. law by not cooperating with the commission. Hearings in that case began this week before an SEC administrative law judge, who could bar the Chinese firms from auditing U.S.-traded companies.
The SEC isn’t the only regulator frustrated by China’s stance. Hong Kong’s Securities and Futures Commission has brought a case against Ernst & Young for failing to produce work papers from its aborted audit of mainland firm Standard Water. The water-treatment company withdrew its application to list in Hong Kong after Ernst & Young resigned as its auditor in March 2010, saying it had found inconsistencies in Standard Water’s documents.
China’s move to turn over the documents comes as this year’s Strategic and Economic Dialogue, the annual set of talks between U.S. and Chinese officials on a wide range of subjects, is about to get under way in Washington. The attempts to improve cooperation between the two countries’ financial regulators may be on the agenda.

JUL 11, 2013 By Michael Rapoport, Dinny McMahon

 

BEIJING—China’s securities regulator is preparing to hand over the audit documents of a U.S.-listed Chinese company to the U.S. Securities and Exchange Commission, the first move by Beijing to make good on a long-awaited agreement allowing the U.S. better oversight of Chinese firms that tap U.S. investors.

 

 Shanghai Securities News, a state-run newspaper, reported Tuesday that the China Securities Regulatory Commission had notified the U.S. it was preparing to hand over the audit working papers of one company to the SEC and the Public Company Accounting Oversight Board. It didn’t name the company or specify the documents involved.
A media representative for the CSRC confirmed the report was correct, without going into more detail.

 

In recent years more than 100 Chinese companies traded on U.S. exchanges have encountered questions about their accounting and disclosure practices from regulators, auditors and short-sellers, resulting in shareholders losing billions of dollars as stock prices plunged. However, the SEC has been limited in its ability to investigate alleged abuses because Beijing has declined to allow China-based auditors to hand over documents for the U.S. regulator to review.

 

 In May the CSRC and China’s Ministry of Finance agreed to allow the PCAOB, which regulates the U.S. audit industry, to see work papers and other records held by Chinese audit firms, in a first concession by Beijing. The SEC wasn’t a party to the May agreement—the PCAOB is allowed to share any documents it obtains with the SEC as long as it gives the Chinese advance notice—but Tuesday’s article suggests China’s regulators may be willing to make greater concessions than first agreed upon.

 

The SEC has contended the Chinese should hand over audit documents under a 2002 agreement for international cooperation among securities regulators that both the SEC and the CSRC have signed.

 

 Most Chinese companies listed on the New York Stock Exchange or Nasdaq Stock Market are audited by the local Chinese operations of foreign firms, including the big four global accounting firms—PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young.

 

A senior executive at one of the big four firms said his firm has recently received a number of inquiries from the CSRC for documents relating to old cases involving U.S.-listed companies, in what appeared to be a move by the regulator to cooperate under the May agreement. He didn’t say what companies had been singled out.

 

 U.S. regulators will be looking to see how much the documents help them in their investigations. The regulators have long been frustrated by China-based audit firms’ refusal to turn over documents about their clients. The audit firms say Chinese law treats such documents as akin to state secrets and that they could be subject to harsh penalties if they help U.S. regulators without the Chinese government’s blessing.

 

The two sides have been wrangling over the issue for nearly two years. In September 2011 the SEC filed an enforcement action against Deloitte for failing to produce documents relating to the SEC’s investigation of Longtop Financial Technologies Ltd., a company based in the Chinese city of Xiamen. Following a spate of short-seller reports earlier that year accusing Longtop of exaggerating the size of its business, Deloitte resigned as auditor, saying it could no longer rely on the company’s disclosures.

 

 The SEC has said it tried but failed to resolve the problem of access to documents with Chinese regulators, and in December it filed administrative charges against the Chinese affiliates of five major accounting firms, alleging they had violated U.S. law by not cooperating with the commission. Hearings in that case began this week before an SEC administrative law judge, who could bar the Chinese firms from auditing U.S.-traded companies.

 

The SEC isn’t the only regulator frustrated by China’s stance. Hong Kong’s Securities and Futures Commission has brought a case against Ernst & Young for failing to produce work papers from its aborted audit of mainland firm Standard Water. The water-treatment company withdrew its application to list in Hong Kong after Ernst & Young resigned as its auditor in March 2010, saying it had found inconsistencies in Standard Water’s documents.

 

 China’s move to turn over the documents comes as this year’s Strategic and Economic Dialogue, the annual set of talks between U.S. and Chinese officials on a wide range of subjects, is about to get under way in Washington. The attempts to improve cooperation between the two countries’ financial regulators may be on the agenda.

 

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