Settlement pending? | China Accounting Blog | Paul Gillis

Settlement pending?

We have had signals over the past few weeks that negotiations are continuing in the standoff between U.S. and Chinese regulators. There was an article in the Chinese press reporting that a proposal for cooperation had been sent to the State Council by the CSRC and the MOF.

Friday, PCAOB member Jeanette Franzel said during a conference at Baruch College that the PCAOB and SEC are making progress on negotiating a memorandum of understanding with the Chinese government.

Some of Franzel’s comments were reported by Accounting Today:

“Unfortunately we have seen a lot of fraudulent activities in those companies, and beginning in 2010 and since then, about 67 of those companies have had their auditors actually resign, and 126 of those issuers have either been delisted from the U.S. exchanges, or they’ve gone dark and are no longer tapping into capital,” said Franzel. “We don’t know how many more are out there and may need to remove themselves from the U.S. markets. Both we and the SEC are trying to negotiate with the Chinese government right now. We’ve been negotiating for quite some time, so there could be some more out there. It is a serious issue for investors who have invested in these companies if we and the SEC do not have oversight, so we continue to work on that.”

“There’s a lack of trust basically at this point in certain classes of Chinese companies that are trading in the U.S. markets,” she said. “They’re trading lower than they already would have, so I think to some extent investors have already been hurt across the board. Certainly in those companies that have exploded and where frauds have been revealed, investors have been harmed as well. We’re currently in the process of negotiating an MoU, a memorandum of understanding, with the Chinese government. We’ve been doing this for quite some time, but we’re hopeful that we’re making progress because the alternatives are not good for the investors who are currently invested in companies over there, and if we think long term about the interaction of our markets with China, we really hope to see a breakthrough soon.”

“On the other hand, if you look at it from the Chinese mindset, the Chinese government owns a lot of companies and so maybe at those companies there are national secrets, but those aren’t the types of companies we’re talking about here. But it could be that type of mindset bleeding over into other types of companies, or they could be afraid of what is in those auditing work papers. In the audit documentation, there could be things that if revealed could be embarrassing and damaging, and others are speculating that they’re simply worried about how we might use the information, even if there isn’t anything bad or embarrassing in that information. If the U.S. government were to get financial details, how would it be used? So there are several theories out there for why there’s been a disconnect, but we are negotiating to basically achieve the same level of oversight that we have in any other foreign jurisdiction where there are audits of U.S.-listed companies.”

Because China is shut down this week for Chinese New Year, it is highly unlikely any deal gets done for few weeks.

I think the SEC case filed against the Big Four and BDO finally got the full attention of the Chinese government. Chinese regulators realized that they are faced with a decision – either cooperate with U.S. regulators or lose access to U.S. capital markets. Earlier I think they hoped that U.S. regulators would give in and rely on Chinese regulators to do the job – much as the EU has agreed to do. But U.S. regulators cannot and should not delegate regulatory oversight to Chinese regulators, and it appears the Chinese now understand that.

Recent comments by PLA Deputy Chief and Central Committee member Qi Jianguo about the importance of national sovereignty suggest that a compromise may be difficult to reach.

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