02 Jul SEC Doubts More Access on China Audits

According to The DealFlow Report, the SEC, in a court filing in its case trying to force a Deloitte affiliate to allow review of its audits of Chinese companies, expressed concern that the Chinese government will not grant greater access to Chinese firms auditing US public companies based there. The SEC’s Public Company Accounting Oversight Board (PCAOB) had reached a tentative agreement with the Chinese authorities to allow US regulators to observe audits, but not to audit the auditors as they are required to do. When the SEC has attempted to demand that the auditing firms turn over their work papers, they refuse, claiming it violates Chinese law.

While the PCAOB signed an agreement in May with the Chinese Securities Regulatory Commission, the SEC’s filing in the court case suggests that the CSRC may not follow through on its commitments, and is still demanding that Deloitte follow through and deliver documents to it. Indeed, the PCAOB deal requires them to inform the CSRC if they are turning documents over to the SEC. This is kind of strange since the SEC oversees the PCAOB. All of this stems from allegations of fraud in a number of Chinese companies that went public in the US, many through reverse mergers with public shell companies.

Hopefully the CSRC-PCAOB squabble can be settled in the near future. If not, there could be serious consequences if the PCAOB decides to refuse to permit Chinese-based auditing firms to audit US public companies.