According to a public statement issued by the China Securities
Regulatory Commission ("CSRC") on July 9, 2013,
China's securities regulator is preparing to hand over the
audit documents of a U.S.-listed Chinese company to the U.S.
Securities and Exchange Commission ("SEC") and the Public
Company Accounting Oversight Board ("PCAOB"). The
announcement comes on the heels of the CSRC's agreement in May
to allow the PCAOB, which regulates the U.S. audit industry, to
access work papers and other records of U.S.-listed companies held
by the Chinese affiliates of American audit firms.
More than 100 Chinese companies traded on U.S. exchanges, as well
as many U.S. companies with substantial Chinese operations, have
encountered questions about their accounting and disclosure
practices from U.S. regulators in recent years. Starting with an
enforcement action against Deloitte's Chinese affiliate in
September 2011, the SEC has sought to obtain audit documents and
work papers from those companies' external auditors, often
Chinese affiliates of U.S. accounting firms. But the China-based
auditors have refused on the grounds that compliance could violate
China's Law on Guarding State Secrets and result in severe
criminal sanctions. On December 3, 2012, the SEC increased the
pressure on the Chinese auditors by bringing additional
administrative charges against the Chinese affiliates of Deloitte
and the remaining "Big Four" accounting firms –
Ernst & Young, KPMG, and PricewaterhouseCoopers – plus
BDO International, Ltd. Meanwhile, U.S. and Chinese regulators have
been negotiating on and off again with the aim of reaching an
agreement that would resolve the apparent conflict between U.S. and
Chinese law, but without a visible resolution.
Hope of progress in U.S.-Chinese negotiations were rekindled in May
when the CSRC and Chinese Ministry of Finance agreed to allow the
PCAOB to seek certain work papers and other records held by Chinese
affiliates of U.S. audit firms. Although the SEC was not a party to
the May agreement, its terms allow the PCAOB to share documents
with the SEC as long as it gives Chinese regulators advance
notice.
The CSRC's unilateral announcement that it will now provide
documents to the SEC may reflect a sea change in cooperation
between U.S. and Chinese securities regulators, but even the SEC
appears skeptical. The implications of the announcement are yet
unclear. The CSRC's announcement did not name the company or
documents involved. In a July 10, 2013 notice filed by the SEC in
the Deloitte enforcement action, the SEC noted that it does not
"know when the production will be made, the extent of
redactions, if any, whether the production will be complete, or
whether there will be potential use restrictions."
Interestingly, the announcement comes as this year's Strategic
and Economic Dialogue, the annual set of talks between U.S. and
Chinese officials, is about to begin in Washington, D.C.
As we have observed previously, the heart of the conflict
between U.S. and Chinese law is political in nature. Whether the
timing of the CSRC's announcement suggests that improved
cooperation between the countries' financial regulators will be
on the agenda at the upcoming talks remains to be seen.
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