U.S. audit watchdog reports progress in China

NEW YORK Tue May 8, 2012 6:47pm EDT

NEW YORK (Reuters) - U.S. officials believe they are close to an agreement to observe audit inspections in China, a first step toward better oversight to address a rash of accounting scandals at Chinese companies listed on U.S. stock exchanges.

Jim Doty, chairman of the Public Company Accounting Oversight Board (PCAOB), which oversees the audit industry, said the breakthrough came in talks between U.S. and Chinese officials in Beijing last week.

U.S. observations of audit inspections in China "will be a first step toward greater cooperation on cross-border oversight and joint inspections," Doty said in a telephone interview on Tuesday.

The plan would let PCAOB officials observe Chinese authorities when they inspect audits that are done in China of U.S.-listed companies, according to Doty.

"There's every reason to believe we could do the observations in the fall, possibly even the summer," Doty said.

However, he added, "one can never guarantee the outcome of this."

The PCAOB and U.S. Securities and Exchange Commission have been working for months with the Chinese to try to hash out a deal that would allow joint audit inspections.

U.S. investors have lost billions of dollars on China-based companies listed on U.S. exchanges after questions were raised about the companies' accounts, prompting a broad probe by the SEC.

China had been reluctant to allow audit inspections by U.S. officials because of sovereignty concerns.

Many of the Chinese firms listing in the United States are audited by the Chinese arms of the Big Four auditors - PricwaterhouseCoopers, Deloitte, KPMG and Ernst & Young - which have been beyond the reach of PCAOB inspectors in China.

Doty said he met with Chinese officials last week while he was in Beijing for annual United States-China talks aimed at strengthening ties between the two countries.

He said his talks, with the chairman of the China Securities Regulatory Commission, Guo Shuqing, and senior representatives of China's Ministry of Finance "were very constructive."

The observations will not substitute for joint inspections, but the process "builds a relationship," Doty said.

U.S. Senator Charles Schumer last year called on the PCAOB to discipline China-based audit firms that do not submit to U.S. inspections. The 2002 Sarbanes-Oxley Act, which created the PCAOB, gave it the authority to discipline auditors that do not cooperate with inspections.

Asked whether pressure to discipline firms has been relieved, Doty said, "ultimately, we must enforce the law."

However, he said the Chinese are interested in market reforms and resolving the issues on cross-border audit oversight. Once observations are completed, the next step would be creating a formal protocol to allow joint inspections, he said.

(Reporting by Dena Aubin; Editing by Kevin Drawbaugh, Bernard Orr and Tim Dobbyn)