Good cop/bad cop | China Accounting Blog | Paul Gillis

Good cop/bad cop

PCAOB Chairman James Doty presented his budget to the SEC Commissioners today. Doty said:

Gaining access to audits of Chinese registered firms has been particularly challenging. But I am grateful to the Secretaries of the Treasury and State for their inviting me, with your support, to participate in the Strategic & Economic Dialogue in each of the last three years.

These meetings proved instrumental to achieving some success. In 2013, we were able to reach an enforcement cooperation agreement with Chinese authorities.

Based on recent discussions, I am also optimistic that we will be able, during 2014, to sign a long-sought agreement to inspect the audit work of PCAOB-registered firms based in China.

In comments to reporters Doty indicated that China and the PCAOB are exchanging draft agreements. The Chinese are having a problem with the PCAOB conducting inspections on the ground in China. Doty indicated they are looking at alternatives including moving the papers and making people available outside of China. Since I am married to a Big Four audit partner, I suggest that the inspections take place in an American location with nonstop flights from China

It seems to me that the PCAOB and the SEC have taken the roles of good cop and bad cop in the negotiations with China. The PCAOB have been the good guys, keeping negotiations going and making meaningless agreements like the enforcement cooperation MOU. The SEC has been the bad cop, banning the Big Four and some smaller firms from practice and apparently refusing to negotiate.  

The PCAOB and SEC do have different needs. The PCAOB needs access to people and data so that it can conduct inspections. The PCAOB uses negative inspection reports to cajole the accounting firms into upgrading the quality of their audits.  The SEC, however, functions as law enforcement. SEC investigations more frequently lead to people and companies being banned from U.S. markets, and can lead to criminal prosecutions. Because the stakes are higher, the SEC is held to a higher burden of proof, and needs unfettered access to source documents and people. It does not seem China is willing to allow that. 

The PCAOB MOU took the heat off of China to negotiate with the SEC. Chinese regulators and most investors incorrectly concluded that the deal was done and were surprised with the recent ban on the Big Four. The PCAOB should be careful not to allow China another way out before a satisfactory arrangement is made with the SEC

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