Move expected to promote China's regulatory standards
Two U.S.-listed Chinese companies are reportedly going to accept checks by the U.S. audit-industry regulator Public Company Accounting Oversight Board (PCAOB), marking a breakthrough in resolving a longtime dispute between securities regulators in the two countries.
The Sino-U.S. cooperation on cross-border audit oversight may put pressure on the Chinese side due to an issue of trust concerning China's accounting standards and audit agencies, but to a certain extent, it would also promote China's regulatory standards, expert said on Sunday.
Chinese tech giants Alibaba Group Holding and Baidu Inc and their audit firms are preparing for the PCAOB inspection, The Wall Street Journal reported on Saturday, citing people close to the matter. The report also mentioned that the U.S. regulator will be able to obtain audit records of Alibaba's and Baidu's accounting books in the next few months, which could be followed by more inspections of auditors hired by U.S.-traded Chinese companies.
Alibaba is audited by the Hong Kong affiliate of PricewaterhouseCoopers (PwC), while Baidu is audited by the Beijing affiliate of Ernst & Young (EY).
Both audit firms were not available for comment on Sunday.
Since 2011, when a number of U.S.-listed Chinese companies were called out on accounting fraud, U.S. regulators have been looking to inspect audit work documents related to the accused companies. However, under Chinese law and regulations, without permission from the Chinese government, domestic accounting firms are not allowed to provide audit documents to foreign regulators.
The regulatory conflict put many audit companies in a dilemma. In January 2014, the U.S. Securities and Exchange Commission (SEC) ordered a ban on the Chinese units of the Big Four accounting firms in the U.S. for six months after they had refused to submit audit documents to avoid violating China's laws and regulations.
"On one side, public companies' audit firms should be subject to regulatory inspection; on the other side, China cannot allow a foreign regulator to inspect Chinese companies' data due to sovereignty concerns," Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times on Sunday.
The audit oversight dispute indicates a lack of trust from the U.S. over China's accounting standards and audit agencies due to the differences between the countries' accounting criteria, Dong said.
Against the background of the regulatory conflict, U.S.-listed Chinese companies have been haunted by fraud concerns in recent years, with their prices seeing wide fluctuations.
"The lack of transparent accounting has made Chinese companies easy targets for short-sellers," said a Shanghai-based securities analyst surnamed Li, who preferred to keep his full name anonymous.
"But it should be pointed out that the relatively low valuation those companies received is not completely caused by the accounting issue," Li told the Global Times on Sunday, noting that the U.S. market is more sophisticated than the A-share market that often overvalues companies.
