James Doty, chair of the Public Company Accounting Oversight Board (PCAOB), reiterated his concern on Chinese audit inspection, according to Reuters report on Nov 11(EST). He observed that some auditors merely follow existing business controls and fail to perform their monitoring roles. In the past weeks, he had proposed to have companies rotate their audit firms to avoid conflict of interest issues.
Prior to these ongoing developments, talks between US and China on streamlining audit procedures for US-listed Chinese companies have been stalled since Oct 24, as Chinese representatives have put off meetings on the matter. Citing past meetings with Chinese counterparts, Doty then expressed worries that any Chinese moves to restrict the flow of audit work papers would go beyond keeping inspectors of his agency out of China.
There have been renewed concerns lately about the audit practices of Chinese companies particularly about their opacity and some investors are losing confidence in the prospects of Chinese companies with questionable corporate governance, such as in the case of Longtop. Chinese regulators are asking the Chinese arms of the world’s largest audit firms to review their audit work on Chinese-listed companies and the information which they might have provided to overseas, including US, regulators.
Doty believes that “U.S. markets and investors have been unfairly taken advantage of by those who want the benefits of American markets but not American rules." The US seems likely to consider implementing rules to apply to the Chinese arms of audit firms in their conduct and the standards used in reviewing companies with US investors. This may limit the phenomenal growth enjoyed by these audit firms in their Chinese operations in the years to come.
The Reuters Nov 11 report can be accessed from here.
The Reuters Oct 24 report on the stalling of Sino-US talks on audit practices can be accessed from here.