By Huw Jones
LONDON, Oct 3 (Reuters) - 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 Wednesday.
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.
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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