I recently penned a piece for Forensic Asia called Accounting Wars: Transnational Regulation in China. It summarizes my previous writings on this topic. I recommend Forensic Asia for those who follow Asian securities.
The SEC has responded to Deloitte’s request that the case related to Longtop’s working papers remain stayed until the SEC case against the rest of the Big Four and BDO is resolved. The SEC points out that the cases have differing objectives. In the Longtop case the SEC wants working papers to be produced. In the administrative proceeding the SEC is seeking to censure or revoke the right of the firms to practice before the SEC (page 6).
There has been no news from the PCAOB. The recent fiasco at Caterpillar will up the pressure on the PCAOB to resolve the inspection situation, since it illustrates that accounting problems in China extend to multinationals as well. The Caterpillar case appears to be a failure in due diligence, rather than an audit failure – indeed Caterpillar’s auditor appears to have not been involved in the transaction, which blew up before an audit was completed. Reports have said that two Big Four firms (other than Caterpillar’s auditor) were involved in the due diligence.
A decision is expected in the Standard Water case in Hong Kong in the next few months. In this case, Ernst & Young refused to turn over working papers to Hong Kong’s Securities and Futures Commission, citing Chinese laws that prohibit it from doing so. The Hong Kong proceedings ares virtually identical to the SEC allegations against the Big Four, and may create a crisis in the Hong Kong markets. While I believe the SEC is willing to kick Chinese companies off of U.S. exchanges, I can’t see Hong Kong regulators taking such a stand.
A reader has pointed out to me that there is a major obstacle to many U.S. listed Chinese companies moving their listings to Hong Kong. Many of these companies use multiple classes of stock to keep control in the hands of founders. These arrangements are apparently not allowed in Hong Kong (or most other markets). There is an easy fix – get rid of the special arrangements for insiders – that will improve corporate governance at the same time.