By Huw Jones
LONDON Oct 3 China-based accountants could be
barred from checking the books of firms listed in the United
States if a deal is not reached next year allowing U.S.
regulators to inspect them, the U.S. audit policeman said on
The Public Company Accounting Oversight Board (PCAOB) has
tried in vain for years to get Chinese permission to jointly
inspect its local accounting firms who compile statements on
firms and affiliates that have a U.S. listing.
There is no deal in sight but PCAOB Chairman James Doty said
the board will start observing inspections by its Chinese
counterpart before the end of this year.
This still falls short of what U.S. law requires.
"Observation is like the motion pictures. We are in the
theatre, we are watching," Doty told Reuters during a visit to
London for a global auditing regulators' conference.
"It either creates a crisp, credible timeline for joint
inspections or leaves us in a position of ambiguity and
remoteness. We are now in a period of 12 calendar months at the
most, which I think is crunch time."
Any accounting firm in the world that wants to check books
of firms listed in the United States must be registered with the
PCAOB and be open to inspections.
Doty said he was ruling out costly battles in the courts to
force overseas accountants to hand over documents. The audit
firms themselves say Chinese data protection rules forbid this.
"All of our procedures would be administrative procedures. I
don't foresee any of this as being federal litigation. We would
have to consider whether we could continue the registration of
Chinese firms," Doty said.
This would affect units of the world's Big Four audit firms
operating in China - KPMG, Ernst & Young, Deloitte, and
PricewaterhouseCoopers - as well as local Chinese auditors.
The PCAOB has signed several such joint inspection
agreements with European countries like Britain and Spain and
Doty expects similar deals soon with Luxembourg and France whose
regulators he has been meeting with in London this week.
An EU law on accounting expires next year, meaning existing
joint deals with bloc countries would lapse in July but Doty
said he was "very optimistic" the European Commission will
extend the law. Doty expects the first inspections by EU audit
regulators on U.S. soil soon.
OPENING THE WINDOWS
Doty, 71 and with another three years left of his term, has
been called an "activist" by his critics who oppose his idea to
force companies to switch audit firms regularly.
He will push ahead with his plans to increase transparency
in audits to give investors more information and improve how
companies they audit are run to "rebuild" credibility in audits.
He expects a proposal to name every accountancy firm that
has audited a significant part of a statement to become a rule
in the first quarter of 2013.
"We know that markets react adversely on learning that a
major part of the audit was not performed by the global firm
whose name is on the opinion but by other firms," Doty said.
The PCAOB will also publish a draft "Audit Report" standard
next spring requiring auditors to tell the public about any
concerns about the company, the biggest change in 70 years.
"Our proposal will be something right down the middle. It
will be something that is balanced, practical and informative."
Doty said. "It's going to be a big deal and I think it will be
effective sometime in 2013."
Doty said change would put pressure on boards to be more
open to investors about problems earlier, before auditors point
out the troubling issues. It would also help limit liabilities
on auditors for failing to spot or warn about problems.
"It's throwing open the windows and there is a strong, fresh
breeze blowing through the boardroom that says let's get
everything out," Doty said.
(Reporting by Huw Jones; Editing by Mark Potter)
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