A US senator is urging federal auditing watchdogs to take immediate disciplinary action against China-based auditing firms that continue to refuse to cooperate, saying negotiations with the Chinese government have gone nowhere.

Senator Charles Schumer, a prominent Democrat on the Senate Banking Committee, laid out his concerns about a lack of oversight of China-based auditing firms to James Doty, the chairman of the Public Company Accounting Oversight Board in a letter on Nov. 22.

"I recognize that the Chinese government is acting to obstruct the board's inspection of registered Chinese audit firms, but this standoff has gone on long enough," Schumer wrote. "I respectfully urge the board to take immediate disciplinary actions against Chinese audit firms that continue to refuse to cooperate."

The board declined to comment on the letter, saying it had not received it yet.

Professor Cui Xuegang of the Beijing Technology and Business University, commented, "As far as I know, the US is asking to put its hands on original documents that are related to national security issues. That explains why Chinese authorities are adopting such a firm attitude toward them."

Zhou Qinye, deputy general manager of the Shanghai Stock Exchange, said that China isn't likely to submit to inspection by a foreign party because the country's state secret law and other laws related to the protection of archives would not allow it.

The US Securities and Exchange Commission and the Public Company Accounting Oversight Board have been in talks with Beijing to allow for joint inspections of auditing firms following a rash of recent accounting scandals. The commission sharpened its focus on the issue last year as dozens of China-based companies listed on US exchanges began disclosing auditor resignations and bookkeeping irregularities.

Many of the accounting issues have arisen at so-called reverse merger companies, or US shell companies that merge with foreign companies in China and elsewhere. Some of the companies in question, however, have also used more traditional front-door methods of entering US markets such as initial public offerings.

The commission and the US Justice Department are both investigating accounting irregularities at US-listed Chinese companies and their auditors. Earlier this month, the commission charged one of the largest, Longtop Financial Technologies, with failing to file current and accurate financial reports.

The two US regulatory bodies have been hoping to strike a deal with the Chinese government to allow for joint overseas inspections, although such a deal so far has proved elusive.

Speaking to the China-based Economic Information Daily, an official from the country's Ministry of Finance said that Beijing is currently adopting the "principle of complete trust," which means in case the US needs to inspect the accounting of a Chinese company listed in the US, it has to file a demand with the Chinese inspection authorities, which will notify the US on the results once the inspections on required fields are done. It is however impossible for the Public Company Accounting Oversight Board to enter China to conduct an inspection by themselves.

A meeting planned for October between the US and Chinese regulators was canceled by the Chinese side. Speaking with reporters earlier this month, Doty said his board is struggling over whether or not it should revoke the registration of China-based auditing firms if Beijing will not permit the inspections.

Schumer, in his letter, said the board has already given the Chinese side six years to negotiate and said he is not optimistic about getting a result. He called the board's failure to take enforcement action "deeply troubling."

"The longer the board countenances this impasse, the greater the danger to American investors and US markets," he wrote.

References

Cui Xuegang 崔學剛

Beijing Technology and Business University 北京工商大學

Shanghai Stock Exchange 上海證券交易所

Economic Information Daily 經濟參考報