The U.S. Public Company Accounting Oversight Board announced a deal Friday with Chinese regulators to access documents held by Chinese auditors, defusing but not fully resolving serious disputes with China.
The Memorandum of Understanding with the China Securities Regulatory Commission and China's Ministry of Finance will let U.S. and Chinese regulators request and get help from each other in obtaining documents for their investigations.
"This agreement with China is an important step toward cross- border enforcement cooperation that is necessary to protect the interests of investors in U.S. capital markets," PCAOB Chairman James Doty said in a statement.
The MOU opens the door for U.S. regulators to check records of U.S.-listed Chinese companies and ratchets down a confrontation that threatened those firms' ability to trade here. America requires public Chinese firms to use approved auditors, conform to international standards and allow access to records if they want to trade on U.S. exchanges.
The U.S.-China faceoff is the outgrowth of a scandal involving U.S.-listed Chinese companies that first erupted in 2010 and caused over 126 of these firms to be delisted. Investors lost billions of dollars in the ensuing sell-offs.
The MOU falls short of the initial PCAOB request to inspect Chinese corporations' accounting records held inside China. But the agency, created by Congress to oversee audits of public companies that trade in the U.S., hopes "our Chinese counterparts" will eventually agree.
Talks continue about joint inspections in China of PCAOB-registered auditors as well as auditing U.S.-listed Chinese firms.
Reaction to the deal in accounting and investment circles was generally upbeat.
"I don't think you can say anything but great," said Drew Bernstein, co-managing partner of global accounting firm Marcum Bernstein & Pinchuk. "It's probably not as much as some people would have liked to have seen. But I think you have to give (U.S. and Chinese officials) a lot of credit for getting it this far.
Andrew Left, founder of Citron Research, one of the short-seller websites that first exposed Chinese firms' irregularities, said, "It's a step in the right direction.
Janet Stites, publisher of China Business Knowledge, an online newsletter that tracks U.S.-listed Chinese firms, said, " It only makes sense that the (Chinese) government would want China-based U.S.-listed companies to be able to thrive on the Western markets. But it took a bit longer than I thought, which did give me some concern.
Others were skeptical. "The proof will be when (the MOU) is actually put to the test," said Gary Kleiman, an emerging markets specialist who runs Kleiman International in Washington, D.C.
SEC Dispute Remains
The accord doesn't cover a separate dispute that involves a U.S. probe of Chinese companies accused of fraudulent accounting. The SEC has demanded that five China-based accounting units — including those of the Big Four — hand over documents of those Chinese firms. But the local affiliates have refused, saying that Chinese regulators have threatened to jail anyone who discloses such information.
"You still have the outstanding SEC issues," Kleiman said. "(The deal) doesn't change the overall investment climate (with China) in terms of governance and corporate reporting.
The SEC and auditors are now in court. If the SEC wins, the local affiliates could lose their right to audit U.S.-listed firms, including those of their Chinese clients.
Until Friday's MOU, China had rebuffed all U.S. requests for Chinese firms' accounting records as violations of national sovereignty.
The MOU will let the PCAOB share China documents with the SEC if Chinese officials get advance notice, the Wall Street Journal quoted Doty as saying. China has reportedly stipulated that the SEC can't routinely obtain records in this manner.
Under the Sarbanes-Oxley Act, the PCAOB oversees all auditors of U.S.-listed firms. About 47 accounting firms in China are registered with the agency, it says.