Sino-US accountancy is at crucial level with SEC probe

Analysts have urged China and the US to set up a framework to address cross-border accounting issues.

It is a subject that has become increasingly significant on the bilateral diplomatic agenda after US regulators said they were set to punish the Chinese affiliates of the four largest accounting firms for blocking investigations of possible fraudulent accounting.

James Lee, regional director of the Institute of Chartered Accountants in England and Wales for China, wrote in an article on Tuesday that it is in the long-term interests of both the US and China to do so, "especially as China is expected to provide increasing capital funding for companies from the US and elsewhere once it develops its international financial center in Shanghai".

The four largest accounting firms — Deloitte Touche Tohmatsu CPA Ltd, Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd — have until Wednesday to attempt to reverse a US Securities and Exchange Commission administrative judge's decision to bar them for six months from auditing Chinese companies listed in the US.

PR officers with the firms said on Monday they could not confirm the date or the progress of the appeal, as there have been no updates on this matter.

Analysts believe the move underscores the desire of US regulators to access the audit papers relating to Chinese companies listed on the US stock exchanges following a slew of alleged frauds in 2011 that sank companies' share prices.

The US commission is in the middle of a review process to decide whether it will uphold the judge's Jan 22 rule, which is neither final nor legally binding yet. The Chinese accounting firms have said they will appeal, a move that must be formally made by Feb 12.

The China Securities Regulatory Commission has on its website expressed disappointment with the judge's ruling and commented that it believes it ignores the efforts and progress made on cross-border regulation cooperation between the US and China. The China commission said the two countries agreed on an arrangement in January that gave US regulators access to files on at least four companies.

"It is regrettable that the SEC's administrative law judge has recommended sanctions against the big four firms in China for failing to produce work papers to the SEC in circumstances where such production would have violated Chinese law and regulations," said the Chinese accounting firms in a joint statement after the ruling.

But they added that Chinese and US regulators have made significant progress over the past year in sharing information, which they had worked hard to support.

"This issue has proven a very complex one to deal with," wrote Lee.

If the ban is upheld by the US Securities and Exchange Commission, more than 200 Chinese companies listed in the US will have to find new auditors. Multinationals with big Chinese operations will also have to make new arrangements.

The incident comes as Chinese companies' enthusiasm to list in the US recovers from a low in 2011, when the market froze following allegations by short-sellers including the notorious Muddy Waters LLC.

Eight Chinese companies went public in the US last year, up from three in 2012. Alibaba Group Holding Ltd, China's largest e-commerce company by sales, sees the US as an option in for its IPO location.

Lee, from the Institute of Chartered Accountants in England and Wales for China, wrote the issue needs to be resolved at three levels.

First, the SEC has to deal better with reverse takeover companies, which are outside the China Securities Regulatory Commission's jurisdiction.

Second, the SEC needs to collaborate with the China Securities Regulatory Commission in resolving disputes involving Chinese companies listed in the US through IPOs on a case-by-case basis.

Third — and most important — regulators must multilaterally agree on a common international framework for cross-border audit oversight, Lee wrote.