Drew Bernstein, Co-managing partner of Marcum Bernstein & Pinchuk LLP has written a response to my recent post about NQ Mobile’s auditor change. I have a great deal of respect for Drew. As I said in my post I think he is among the best of the non-Big Four firms working the Chinese market. He might actually be better than many of the Big Four audit teams working on U.S. listed clients. But the Big Four brand is expected by many market participants, and this will always prove a challenge for specialty firms like Drew’s. Nonetheless, MarcumBP was probably the best alternative for NQ Mobile in this situation.
I would like to thank Paul for his regular stream of sharp, well-informed observ-ations about auditing Chinese companies listed overseas, as well the positive comments about my firm, MarcumBP, in this piece. At the same time, I would like to clarify some issues that might cause confusion for the casual reader of this commentary.
As Paul knows firsthand, auditing U.S.-listed Chinese companies is a complex business. To be effective, an auditor must have in-depth knowledge of China’s business practices and regulatory framework, and be highly trained in ever evol-ving SEC accounting rules. While China has grown into an economic superpower, its legal and business information practices are still that of a developing country. An American auditor without experience in China might have great dif-ficulty adequately testing the financial statements. High-level expertise in U.S. GAAP and SEC accounting issues are still in short supply in China.
This presents a real challenge for any auditor that wants to be active in China: How do we create a process that will earn the trust of investors and regulators, while also being able to operate effectively in China’s very specific business en-vironment?
The Big Four have resolved this issue by primarily turning over the audits of U.S.-listed Chinese companies to their affiliates in China, for whom SEC account-ing and auditing is often a very small part of their overall business. In the case of NQ, it is PwC Zhong Tian. As Paul has documented, this has been a source of continued strife since the Chinese affiliates cannot be inspected by the U.S. PCAOB and have also refused to cooperate with U.S. regulators in instances of suspected fraud, for fear of being punished by Chinese authorities. The Chinese affiliates may receive some support from U.S. or Hong Kong branches of the accounting firms, but at the end of the day the U.S. Big Four will disavow any legal responsibility for the audits.
In building MarcumBP’s business in China, we have taken a somewhat different approach. SEC accounting and auditing is our primary focus in China. All of our staff receives intensive, ongoing training in U.S. GAAP accounting and U.S. GAAS auditing. Just as importantly, they understand how business is done in China, including local accounting systems, banking relationships, customer bill-ing, and government filings. In fact, MarcumBP employed enhanced China spec-ific audit procedures including verification processes for cash and AR now used by the Big Four long before they became standard industry practice in China. Audit teams from our 4 offices in China with support from our offices in the U.S., truly operate as integrated units. Senior partners signing off on the audit know in great detail how the work was performed and who performed it. MarcumBP is subject to PCAOB inspections, to verify that our procedures remain robust.
As Paul has chronicled, the practice of auditing overseas-listed Chinese com-panies is constantly changing, as regulators on both sides of the ocean try to meet their mandates. However, in my experience, those who are truly com-mitted to this market will always find a way to continue practicing in a quality way. If the proposed regulations by China’s Ministry of Finance are adopted, I am very confident MarcumBP will find a solution that meets the needs of our clients, U.S. regulators, and investors.
As unpredictable as this market can be, I can provide a few assurances about Marcum BP’s China practice:
1) Our single greatest priority will remain to provide high quality audits that in-vestors can rely upon in making decisions.
2) We will continue to employ a streamlined, integrated approach that allows us to work efficiently and resolve issues quickly.
3) We will regularly seek to educate Chinese management about the interna-tional accounting, governance, and business reporting standards required for success as an overseas-listed company (including events Paul has participated in!).
I hope that this provides Paul and his readers with some assurances about our commitment to this market and our capability to serve our clients.
Marcum, Bernstein & Pinchuk