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Client Alert

“Accounting Cliff” Looms for Public Companies with Operations in China
Author: Thomas M. Shoesmith

The Public Company Accounting Oversight Board (PCAOB) has been trying to exercise its oversight responsibilities with regard to registered accounting firms in China for years, but so far has been prevented from doing so by PRC authorities. If the PCAOB cannot complete its inspections of these firms by December 31, the firms may be deregistered, and U.S.-listed companies with operations in China could find themselves with a new reason to fear they will not be able to comply with their obligation to file audited financial statements with the Securities and Exchange Commission. Meanwhile the SEC’s brief filed in the Deloitte case paints a gloomy picture of any possible agreement with the Chinese authorities.

There are hundreds of U.S. public companies whose principal operations are in China. All of them must file financial statements with the Securities and Exchange Commission (SEC), and certain of those financial statements must be audited by an accounting firm registered with the PCAOB. Often the accounting firm is the PRC affiliate of an international accounting firm.

The PCAOB was established under the Sarbanes-Oxley Act and its members are appointed by the SEC. As board member Lewis Ferguson recently noted, the PCAOB was created in response to the “systemic and undetected financial and accounting fraud” involved in the Enron, WorldCom, and other scandals of the early 2000s. There are now 2,380 audit firms registered with the PCAOB, including 915 firms located outside the United States. The largest number of foreign firms registered with the PCAOB are Chinese: 52 firms in Hong Kong and 48 in the People’s Republic of China.

The PCAOB has cooperative agreements with 14 foreign regulators (in Australia, Canada, Dubai, the UK, Germany, Israel, Japan, the Netherlands, Norway, Korea, Singapore, Spain, Switzerland and Taiwan). There is no cooperative agreement with the China Securities Regulatory Commission (CSRC) or the PRC Ministry of Finance, the bodies with regulatory authority over accounting firms in the PRC.

The PCAOB has been trying to conduct inspections of accounting firms located in the PRC for many years. Absent a cooperative agreement with the Chinese authorities, however, the PCAOB is barred from conducting any inspections in China. Meanwhile the problems with U.S.-listed Chinese companies have mounted. More than 65 China-based issuers have had their auditors resign, and 126 issuers have either been delisted from U.S. securities exchanges or “gone dark,” according to the PCAOB.

To read this publication in its entirety, please click the link in the adjacent "Download" section.
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