SEC Revives Fight Over Inability to Inspect Chinese Auditors of Alibaba, Baidu
December 07 2018 - 8:14PM
Dow Jones News
By Dave Michaels and Michael Rapoport
American regulators resurrected a long-simmering fight over
their inability to inspect audits of Chinese companies that are
traded on U.S. stock exchanges, saying the situation prevents
investors from getting information they need.
The U.S. Securities and Exchange Commission said Friday that,
despite several years of talks with its Chinese counterparts,
regulators still face obstacles to getting information needed for
accounting investigations and inspections of China-based
auditors.
The SEC issued the statement in advance of a major accounting
conference on Monday where its chairman, Jay Clayton, plans to
speak about the problem.
"China's state security laws are invoked at times to limit U.S.
regulators' ability to oversee the financial reporting of
U.S.-listed, China-based companies," the SEC said in a joint
statement with the Public Company Accounting Oversight Board. "The
inability to date to achieve this level of regulatory cooperation
with Chinese authorities raises a number of investor protection and
general oversight issues."
While the SEC enforces securities laws and can bring enforcement
actions against public companies and accountants, the PCAOB focuses
its efforts on inspecting the work of public-company auditors. The
PCAOB's work is overseen by the SEC.
The Chinese Embassy in Washington didn't immediately respond to
a request for comment.
The SEC's revival of the issue came at the end of a week when
relations between Washington and Beijing were strained following
the arrest in Canada of a top executive of Huawei Technologies Co.
American authorities requested the arrest of Meng Wanzhou, alleging
she covered up Huawei's control of a company called Skycom that was
illegally doing business in Iran, a Canadian prosecutor said
Friday. China has called on the U.S. to release Ms. Meng.
A person familiar with the SEC's thinking said the timing of its
Friday statement was unrelated to the Huawei arrest or to broader
tensions with Beijing. The statement was intended to remind
accountants and American investors of financial-reporting risks at
companies whose books and records are out of reach of U.S.
regulators, the person said.
The SEC statement said U.S. regulators could impose more
oversight on U.S.-listed companies that rely upon those auditors.
The measures could include forcing the firms to disclose more about
their business or accounting and restricting their ability to sell
new shares.
The statement didn't raise the biggest threat American
regulators hold over foreign auditors: the possibility they could
be barred from auditing U.S.-traded companies if the U.S. can't
exercise full oversight over them.
The fight over Chinese-based auditors dates back more than a
decade, to when many Chinese companies went public on U.S. stock
exchanges by merging with an American shell company. Such "reverse
mergers" gave the Chinese companies access to a U.S. investor base
with little upfront scrutiny from the SEC.
Many of the firms were a bust, and the SEC ultimately filed
dozens of enforcement cases against Chinese companies and their
auditors, attorneys and other "gatekeepers."
Representatives of the Big Four U.S. accounting firms --
PricewaterhouseCoopers, KPMG, Deloitte Touche Tohmatsu and Ernst
& Young -- couldn't immediately be reached for comment Friday
on the SEC's statement.
The Big Four are global networks with separate member firms in
each country where they do business, and the PCAOB inspects each
member firm separately.
Dozens of U.S.-listed companies from China were later delisted
from the exchanges or subject to trading suspensions. Nasdaq and
the New York Stock Exchange later raised their listing standards to
make it harder for new overseas firms to suddenly list on their
markets.
The SEC said 224 U.S. companies, with a combined market
capitalization of more than $1.8 trillion, are located in countries
where there are obstacles to PCAOB inspections. Almost all of them
are in China or Hong Kong, and include giants like Alibaba Group
Holding Ltd., Baidu Inc. and JD.com Inc. The bulk of the companies
are audited by affiliates of one of the Big Four firms.
In addition, Chinese audit firms also contribute significant
amounts of work to the audits of numerous U.S. multinational
companies that do business in China, including Walmart Inc., Pfizer
Inc., 3M Co. and Texas Instruments Inc., The Wall Street Journal
reported in July.
PCAOB inspectors typically inspect the audits of companies
trading on U.S. markets to gauge their performance and compliance
with auditing rules, even if the firms or the companies are outside
the U.S.
But the Chinese government has long prevented the U.S.
accounting board from inspecting auditors in China and Hong Kong.
Beijing is concerned about sovereignty, and regards the sensitive
financial information about Chinese business that the audit firms
hold as akin to "state secrets."
Write to Dave Michaels at dave.michaels@wsj.com and Michael
Rapoport at Michael.Rapoport@wsj.com
(END) Dow Jones Newswires
December 07, 2018 19:59 ET (00:59 GMT)
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