I have been hearing several rumors about VIEs lately. While these all come from reliable sources, I don’t know how accurate they are. Nevertheless, the rumors illustrate real issues.
I am hearing that one company had VIE agreements that had an expiration date, and that they inadvertently let the agreements expire. They got the agreements back in place; however, there was a period of time when no agreements were in effect. No agreements, no control. No control, no VIE. No VIE, no consolidation. This company faces restatement. Worse yet, there might have been some backdating, and someone might be in deep trouble with the SEC on that. Auditors should be on the lookout for this problem.
I have heard of a couple of situations where the local Administration of Industry and Commerce (AIC) bureaus have been asking questions of the VIEs of multinational corporations. While the VIEs of U.S. listed Chinese companies have not been challenged, apparently some AICs are asking MNC VIEs to certify that they have no foreign control. This is a reasonable request since if the VIE is in a restricted or prohibited industry, it should not be controlled by foreigners. If the company signs that certification, I don’t know how they could justify continuing to consolidate the VIE. “We lied to the Chinese government, we actually do control the VIE?” Auditors ought to be looking for this as well.
I have also heard that the SEC has called the technical people from the Big Four firms in for a chat about the use of VIEs in China. My source thought the SEC wanted to learn more about how VIE accounting works in China. I think the SEC knows VIE accounting in China very well and the meeting more likely is about issues the SEC has with current practice. Stay tuned.