U.S. Officials Visit China to Discuss Audit Issues
July 10, 2011 (Associated Press) SHANGHAI - U.S. and Chinese finance officials are meeting in Beijing this week hoping to make progress on long-standing differences over how to oversee the auditing of Chinese companies whose shares are listed in U.S. markets.
The meeting comes as questions over possible accounting problems at such companies overshadow fundraising efforts both in the U.S. and in China.
American stock and auditing regulators will meet Monday with officials from China's Securities Regulatory Commission and its Finance Ministry.
The chairman of the Public Company Accounting Oversight Board, James R. Doty, said he believed Chinese authorities shared the common goal of seeking to protect investors and ensure quality of audits.
"This meeting is the commencement of our accelerated efforts with the People's Republic of China to forge a cooperative resolution to cross-border auditing oversight," he said, speaking last week before leaving for China.
Beijing has balked at allowing inspections required by U.S. law of audit companies operating inside China, contending they would violate its sovereignty. But progress through high-level economic talks has raised the likelihood of an agreement, says Paul Gillis, a professor of accounting at Peking University's Guanghua School of Management.
"They may let them in jointly, with a team from the Ministry of Finance," he said.
Gillis noted that European officials had expressed concerns similar to the Chinese before agreements were worked out on oversight of auditors there.
Scrutiny of auditing has taken on greater urgency as U.S. stock regulators and exchanges have suspended trading in more than a dozen Chinese companies whose shares were listed publicly through so-called reverse mergers, which involve the purchase of an existing public shell company.
Though many of such companies use U.S.-based auditors, the U.S. side has cited as a chief concern a lack of current, accurate information about the companies and their finances.
"Given the potential risks, investors should be especially careful when considering investing in the stock of reverse merger companies," Lori J. Schock, director of the SEC's Office of Investor Education and Advocacy, said last month in a statement.
According to the accounting oversight board, as of March 31, 159 Chinese companies had listed shares in the U.S. using reverse mergers since Jan. 1, 2007. Meanwhile, 56 companies had issued shares using more rigorously regulated initial public offerings.
Questions over some Chinese companies whose shares are traded on U.S. markets gained attention as short-sellers began targeting such companies, driving their share prices sharply lower.
In some cases, the companies have fought back, complaining that the accusations of accounting fraud or other problems were unfounded. But in others regulators have seen fit to suspend or delist the companies or at least investigate.
"There is a growing amount of concern over Chinese companies listed in the U.S. through regulatory holes," Gillis said. "It's all coming together in a big storm now."
Under the Sarbanes-Oxley Act of 2002, all public companies whose shares trade in the U.S. must use auditors registered with the board, regardless of where the companies and their auditors are located.
According to the auditing oversight board, 110 of the more than 900 non-U.S. auditing firms registered are based in Hong Kong or China.
At times in recent years, mainland Chinese companies' shares have drawn intense interest among investors keen to tap into the country's stunning growth but barred by Chinese regulators from trading directly in the mainland Chinese markets, which are mainly limited to domestic buyers.
China's own share markets, barely 20 years old, are still dogged by complaints over insider trading, market manipulation and other abuses. China's regulators have sought to beef up oversight, but the country lacks anything akin to the accountability standards of Sarbanes-Oxley, which was set up after scandals like those at Enron that causes billions of dollars in investor losses.
The pace of fundraising in China, meanwhile, has slowed to a trickle as both companies and regulators seek to avoid overwhelming investors with a deluge of share offerings. The controversy over Chinese companies has likewise cast a pall over Hong Kong trading.
The benchmark Shanghai Composite Index ended last week at 2,797.70, less than half the peak it attained in 2006, and down 7.7 percent in the past three months.