What is the end game? | China Accounting Blog | Paul Gillis

What is the end game?

Last week I wrote that the President’s Working Group proposal to make the U.S. Big Four  (the Big Four audit all Chinese companies of any substance) the principal auditors of Chinese listed companies was naïve and unworkable, and that that might have been the plan. The proposal requires the U.S. member firms of the Big Four to assume liability for the audits of their Chinese member firms, and for China to allow the U.S. Big Four to remove audit working papers potentially containing state secrets from China. I don’t believe either will happen. 

The Washington Post has a story that explains this is a well-used tactic of the Trump administration. Propose an unworkable solution and either get your way or force your opponents to spend considerable effort to defeat it.

I understand that the PCAOB is no longer involved in the negotiations. They have been taken over by the White House and the SEC, which is working closely with the Big Four. Some corporate governance types fear the objective is to weaken or eliminate PCAOB inspections, and not just for Chinese companies.  The parties all know that China will not allow the U.S. Big Four to conduct audits in China and to remove working papers. The end game is said to allow the Big Four to self-inspect its China member firm’s audits as a substitute for PCAOB inspections.  

China can, and perhaps should, block foreigners from looking at workpapers of Chinese companies that might contain state secrets. That is problematic, since most audit partners of U.S. listed Chinese companies are foreigners. And inspection teams would include mostly foreigners.  

The idea of replacing PCAOB inspections with internal firm inspections is a bad one. The firms already do internal inspections, and that does not seem to have stopped fraud. I don’t think PCAOB inspections are likely to ferret out fraud either.  However, giving up on PCAOB inspections, particularly for non-Chinese companies would significantly weaken investor protection.  

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