U.S.-China Audit Clash Could Have Broad Reach

SINGAPORE — Some major multinational companies are concerned that they could be drawn into a potential accounting crisis amid a continuing dispute between U.S. and Chinese financial regulators over access to corporate audit documents.

The standoff over Beijing’s refusal to give regulators in the United States access to audit records for nine Chinese companies listed in North America has the potential not only to force Chinese companies to delist from stock markets in the United States, but could also put American companies that do business in China in a position where they have difficulty producing audited accounts, according to accounting experts.

“The potential consequences of failure to find common ground are almost too frightening to contemplate,” Thomas Shoesmith, a partner at the law firm Pillsbury, said in a note to clients.

This past week, the U.S. Securities and Exchange Commission charged the Chinese affiliates of five of the world’s biggest auditing firms with violations of U.S. securities law, raising fears that it could go further and ban the affiliates from working on audits of companies listed in the United States.

“If these five accounting firms are barred from practicing before the S.E.C., it seems certain that companies with major Chinese operations will find it difficult or impossible to find accountants,” Mr. Shoesmith said.

U.S. companies with major Chinese operations include businesses like the chip maker Advanced Micro Devices, the fast-food group Yum Brands, the technology firm Qualcomm and the construction equipment maker Caterpillar. Some have begun to show concern about the possible impact of the dispute.

“It would impact us and any other U.S. company with significant operations in China,” said Jonathan Blum, a spokesman for Yum, which operates KFC and Pizza Hut restaurants in China. “Essentially, there would be no auditors in China that the U.S. government would recognize. It will require a diplomatic resolution, I believe, and we are monitoring the situation.”

Caterpillar also appeared eager for a settlement. “As this issue revolves around differences between U.S. and Chinese regulators, Caterpillar hopes each side can work to resolve this issue while demonstrating mutual respect and understanding for the laws and regulations of each country,” the company said in an e-mailed response to questions.

Multinational companies operating in China commonly use Chinese affiliates of the so-called Big Four accounting firms — Deloitte, KPMG, PricewaterhouseCoopers and Ernst Young — to audit their Chinese business divisions.

In China, the affiliates say that they are prevented by state secrecy laws from releasing audit papers to U.S. regulators. Washington’s reach is also hampered by the structure of the auditing groups, which are set up as global networks of legally separate, national affiliates aimed at insulating the groups from difficulties encountered in specific jurisdictions.

The S.E.C. began proceedings last Monday against the Chinese affiliates of the Big Four as well as the second-tier audit firm BDO. The charges center on the affiliates’ refusal to turn over to the U.S. authorities the paperwork from audits of nine U.S.-listed Chinese companies suspected of possible wrongdoing.

Months of talks between the Chinese Securities Regulatory Commission and U.S. regulators have failed to reach a solution, and lawyers are struggling to see a way forward.

“The C.S.R.C. won’t back down on the State Secrecy Law,” James Zimmerman, a lawyer in Beijing at Sheppard Mullin Richter Hampton, said of the Chinese commission. “If the S.E.C. and C.S.R.C. are unable to find common ground and reach a consensus, China can expect that the U.S. will stall or refuse to cooperate in other ways in the future. Then it becomes tit-for-tat.”

China’s securities regulator has not commented on the issue since the S.E.C. charged the Chinese auditing affiliates, but it indicated recently that both sides were trying to reach a solution.

“Audit papers are very important to maintain market integrity and the C.S.R.C. is ready to cooperate with other jurisdictions on this issue,” Tong Daochi, the director general of international affairs at the C.S.R.C., said last week at a conference in Hong Kong.

Mr. Tong said his agency had talked with counterparts in the United States and Hong Kong regarding the issue of sharing Chinese audit working papers. “We are making progress and I think we should be able to work out a way to get them out,” he said.

Article source: http://www.nytimes.com/2012/12/08/business/global/us-china-audit-clash-could-have-broad-reach.html?partner=rss&emc=rss