Audit watchdog sees progress on talks with Chinese

WASHINGTON Tue Dec 4, 2012 8:01pm EST

WASHINGTON (Reuters) - The U.S. audit watchdog is optimistic about its negotiations with Chinese regulators over potential joint inspections of Chinese audit firms, even as the U.S. Securities and Exchange Commission ratchets up a related standoff over access to audit documents.

Lewis Ferguson, a member of the Public Company Accounting Oversight Board and one of the key negotiators with the Chinese, said the PCAOB last week gave its Chinese counterparts a draft proposal that could open the door for joint inspections.

He added that he hopes the PCAOB can take the next step of observing the Chinese during an inspection.

"We presented them with a draft memorandum of understanding ... and we talked about some approaches that I am hopeful will lead to a break-through, at least on the inspections," he told Reuters on the sidelines of an accounting industry conference.

"The meeting was very good and we talked about possible further meetings ... I'm reasonably optimistic we'll be able to come up with something," he added at the American Institute of CPAs event in Washington, D.C.

Ferguson's tone on Tuesday was starkly different from the one taken by the SEC on Monday.

The SEC began legal proceedings against the Chinese affiliates of Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young after those firms failed to supply documents relating to audits of U.S.-listed Chinese companies suspected of possible wrongdoing.

The SEC took the enforcement action after talks apparently broke down between the SEC and the Chinese government over the sharing of audit work papers.

The firms contend that Chinese state secrecy laws prevent them from turning over the information, and say the Chinese and U.S. need to come up with the deal before they can comply with the SEC's request.

The legal move raises tensions in that showdown, which experts say could kill off U.S. listings for Chinese firms if not resolved.

The United States wants greater oversight after a rash of accounting scandals at U.S.-listed companies based in China have damaged investor confidence.

PCAOB officials at the conference on Tuesday said their talks should be viewed as separate and independent from the SEC's enforcement cases.

"We're continuing to proceed the way we have been. The SEC has its cases that it brought, but we are continuing to proceed with our negotiations and our dealings," said PCAOB board member Jeanette Franzel, who was not involved in last week's talks but is expected to be briefed later this week.

"The SEC's actions are separate from ours," she added.

Howard Scheck, chief accountant for the SEC's enforcement division, said at the conference that the SEC "is protecting the commission's processes."

"We want to be able to get access to the work papers in order to look at the quality of the audits, make sure we can enforce the securities laws and make sure we can investigate these issuers," he said.

The big question that remains is whether actions by the SEC or the PCAOB could effectively prevent the firms from conducting audits of U.S.-listed Chinese companies.

In the PCAOB's case, the watchdog could consider revoking the registration of the firms - a drastic option it has yet to take because of its potential wide-reaching implications.

The SEC's case, meanwhile, could lead an administrative law judge at the agency to bar the firms from practicing before the commission if he or she rules in the SEC's favor.

PCAOB officials on Tuesday declined to discuss the possibility of revoking registrations.

(Reporting By Sarah N. Lynch in Washington; additional reporting by Dena Aubin in New York; Editing by Karey Wutkowski and Tim Dobbyn)

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