DealBook: An Agreement Opens Some Chinese Audit Papers to the U.S.

Philip Scott Andrews/The New York TimesJames R. Doty, center, chairman of the Public Company Accounting Oversight Board, an independent agency that oversees accounting firms.

Accounting regulators in the United States and China announced on Friday in Beijing that they had reached an understanding that could give American fraud investigators access to work papers of Chinese audit firms. Until now, American efforts to see such papers have been rejected.

The memorandum of understanding was signed by the China Securities Regulatory Commission and the Ministry of Finance for China, and by the Public Company Accounting Oversight Board for the United States.

“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,” said James R. Doty, the chairman of the American group.

Whether the agreement will result in more cooperation remains to be seen, however. China retained the right to reject requests if they violated Chinese law or “essential national interest.”

In addition, the agreement covers only enforcement actions, not routine inspections of audit firms.

In an interview, Mr. Doty called the agreement “the culmination of years of effort” and voiced hope that progress could be made this year on arranging joint inspections of Chinese audit firms by the two countries. He said it could lead to cooperation that would be equal to that now provided by European authorities.

Under the Sarbanes-Oxley Act passed in 2002, accounting firms that are involved in the auditing of companies whose securities are sold to the public in the United States must register with the American board and submit to inspections by it. Many Chinese firms have registered, but no inspections have taken place. In addition, the Securities and Exchange Commission has sought work papers from Chinese audit firms as it investigated a string of frauds but has been turned down because the firms said they would be violating Chinese law if they turned over the papers.

Mr. Doty said that the inspectors from his board had been able to “observe the quality control reviews” of Chinese firms, made by Chinese regulators, but had not been able to observe reviews of actual audits.

Under the new memorandum, he said, if the board is investigating a potential fraud, it will be able to ask for papers from the Chinese audit firm through the Chinese regulators. The securities commission regulates the larger firms, but many smaller ones are regulated by the finance ministry. The regulator would then decide whether to forward them to the American inspectors.

If such papers are supplied to the United States board, they could then be obtained by the S.E.C. But the board cannot investigate other types of violations of securities laws, like insider trading, and therefore could not seek documents related to other investigations.

The American board has the power to revoke the registrations of firms that cannot be inspected, but it has not chosen to do so with overseas auditors and probably would not do so without approval of the Treasury Department. Mr. Doty said that such an action had not been ruled out, however, if additional progress was not made.

Article source: http://dealbook.nytimes.com/2013/05/24/an-agreement-opens-some-chinese-audit-papers-to-the-u-s/?partner=rss&emc=rss