Yesterday’s International Herald Tribune has a good article about the U.S./China auditing spat.
Most interesting to me is a comment made by Tong Daochi, CSRC Director General of International Affairs, at a conference last week in Hong Kong. Tong is reported to have said “Audit papers are very important to maintain market integrity and the CSRC is ready to cooperate with other jurisdictions on this issue.” Tong further indicated that with respect to the discussions with the U.S. “We are making progress and I think we should be able to work out a way to get them out”.
Tong was speaking in Hong Kong while his colleagues were in Washington meeting with the SEC and PCAOB, and based on the SEC’s actions since, I think we know how that meeting came out. So why would Tong say something so incongruous with his colleagues?
I believe this points to an internal conflict within the Chinese bureaucracy.
The accounting profession in China is jointly regulated by the CSRC and the Ministry of Finance (MOF). Because the audits at issue are mostly for companies that are not listed in China, the MOF is really the lead regulator. The CSRC, under the leadership of Guo Shuqing, has always seemed more globally oriented, recognizing that participation in global capital markets requires accepting global standards and close cooperation with foreign regulators. MOF may be more ideological, less interested in globalization, and more protective of China’s sovereignty.
Tong’s comments suggest that if the issue of audit cooperation had been left to the CSRC, the problem would have been solved long ago.
China faced this problem earlier in the development of its domestic stock market. It was fixed in two steps. The CSRC was put in charge of accounting regulation for listing companies, and it was elevated in the Chinese bureaucracy to directly report to the State Council. It may be time to do something similar for overseas listed companies.