China to hand over documents for U.S. accounting probes

SHANGHAI/NEW YORK Thu Jul 11, 2013 12:22am IST

SHANGHAI/NEW YORK (Reuters) - China's securities watchdog said it is ready to turn over audit documents of a Chinese company listed in the United States to U.S. regulators, signaling the latest breakthrough in a two-year international dispute over accounting scandals.

The U.S. Securities and Exchange Commission has been struggling to obtain papers from China to investigate possible accounting fraud at dozens of Chinese companies listed on U.S. stock exchanges. China has resisted for years turning over documents because of state-secrets and sovereignty concerns.

The China Securities Regulatory Commission (CSRC) is now ready to transfer audit papers to the SEC, and the Public Company Accounting Oversight Board (PCAOB), a CSRC spokesman said, confirming local media reports. He did not identify the company in question, or say when the handover will take place.

The gesture reflects China's willingness to improve co-operation with U.S. regulators, coinciding with high-level bilateral economic talks in Washington. It could also help restore confidence in China-based companies listed on U.S. exchanges and make it easier for firms in China to start tapping American capital markets again.

"If the SEC and CSRC are indeed singing from the same songbook on this and have found a way to resolve their stand-off over Chinese audit work papers, the capital markets will be safer for investors and a new era of cross-border comity between the world's leading economies may have dawned," said William McGovern, a partner at Kobre & Kim law firm in Hong Kong.

The stand-off between U.S. and Chinese authorities over accounting regulation has taken on an increasingly high profile, with global audit firms and major business groups and politicians calling for resolution.

The release of documents to the SEC would mark the second breakthrough in the accounting spat. In May, China agreed to turn over documents to the U.S. audit regulator, the PCAOB, under certain circumstances, though no papers have actually been transferred.

Giving the SEC direct access to documents would allow much broader investigations of accounting frauds. The PCAOB has oversight only of auditors, not the companies committing financial fraud.

The CSRC's decision was first reported by the official China Securities Journal and the Shanghai Securities News.


The U.S. capital markets all but shut down to China-based companies after investors lost billions of dollars to alleged accounting frauds in China since 2010.

Scores of China-based companies have already been delisted from U.S. exchanges and new listings have slowed to a trickle.

The CSRC spokesman urged overseas regulators to punish ill-intended short sellers and protect the interests of overseas-listed Chinese companies and their shareholders.

The spotlight has also been thrown on the world's top five accounting firms, which audited the financial statements of the U.S.-listed Chinese companies.

In December, the SEC charged the Chinese affiliates of accounting firms Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young with securities violations for refusing to produce documents.

The firms said they could be prosecuted for violating state-secrets law if they released the papers. An administrative trial on the case kicked off on Monday.

The SEC did not immediately respond to a request for comment. It was not immediately clear how the release of documents would affect the SEC case.

"The timing is very interesting," said Brian Burke, counsel for Shearman & Sterling in Hong Kong. "Now on one side of the globe there is an apparent thawing of what has been a very tense relationship, and yet in the United States the SEC is still going full-steam ahead against the auditing companies without relenting."

The CSRC spokesman said that after papers are handed to U.S. regulators, there would be no legal basis to prosecute the accounting firms.

The matter is also expected to be addressed at the two-day U.S.-China talks in Washington starting on Wednesday.

One key unresolved issue is U.S. access to inspect audit firms in China.

Obtaining documents for SEC probes is a partial measure, but it will be difficult to prevent frauds without audit inspections, said Brian Fox, president of, a Brentwood, Tennessee firm that provides confirmation services for audits.

"It's good to know in hindsight that fraud was happening but it doesn't do much good for U.S. investors," he said.

(Additional reporting by Rachel Armstrong in Singapore and Sarah Lynch in New York; editing by Ryan Woo and Matthew Lewis)

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Comments (4)
DZHNews wrote:
Another indicator of deepening cooperation in audit work concerning firms listed in the U.S.

Jul 10, 2013 12:32pm IST  --  Report as abuse
sternhrad wrote:
>The CSRC spokesman urged overseas regulators to punish ill-intended short sellers and protect the interests of overseas-listed Chinese companies and their shareholders.

Well, that’s a bit rich, though not surprising coming from the Chinese. The “ill-intended” shorts sellers did the gum-shoeing that brought the ill-intended Chinese companies to light, and the SEC has been pushing on China with the goal of protecting investors and honest companies, while China has only stood obstinately in the way for two years.

Jul 10, 2013 5:16pm IST  --  Report as abuse
G0DM0D3 wrote:
The Truth – in a (rather large) nutshell:

For years, naive and overly optimistic foreigners have given China the benefit of the doubt regarding financial management when, in honesty, their system is so corrupt here that cooked books and the kind of major criminal activity that was apparent in Arthur Anderson and the Enron scandal in the US….is precisely the ‘order of the day’ in China. Nearly all Chinese companies have two books and the customers NEVER see the real numbers. Even the legal system here is broken and only supports Government officers and those with enough money to buy ‘justice’ – if there is such a thing. Everyone in China knows this – both citizen and officer, but nobody does anything about it. In America, you go to prison for life, for such things. Now, people outside of China are slowly starting to realize the truth…meanwhile, the Chinese are still devising tricky ways to cheat you out of your money while they quickly and desperately try to learn how to develop their businesses and nation so that it is International compatible…without spreading crime outside their own country or becoming killed or jailed in a foreign country in the process. Tragically, such is the effect that sudden economic prosperity and opportunity in China has had on this nation of people with rudimentary educations (the educational system is also a failing, tragically exploited money pit) and not much ethical guidance at all (that comes with education and, yes it includes ALL people with no ethics who think you are wise, not just the Chinese!). It is quite nearly what will destroy China’s economic prosperity and bring their current economy to a screeching halt.

You can trust this assessment. I’ve been here a decade, am still here and have mastered safe business in China(definitely a challenge). Also, as an int’l business owner an accountant for the US Government (US Army), I’ve seen many things that those inside the US are unaware of. Sadly, this is the same kind of thing that happens everywhere, in all countries. The only difference being the rate at which the process has evolved. Where did all the wise, ethical humans go? I sure hope they don’t become extinct!

Jul 10, 2013 9:45pm IST  --  Report as abuse
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