U.S. watchdog downplays deadline on China audit inspections

Fri Dec 21, 2012 1:38pm EST

Dec 21 (Reuters) - A senior official at the U.S. corporate audit industry's watchdog is downplaying speculation in some quarters about a showdown looming at the end of the year with Chinese regulators over audits of U.S.-traded Chinese companies.

Lewis Ferguson, a member of the Public Company Accounting Oversight Board, told Reuters on Thursday that no action is imminent and dialogue with China is "continuing."

He said it would be mistaken to expect immediate action because of a Dec. 31 deadline that is part of a 2009 rule that calls for the board to finish inspections of foreign audit firms, including firms in China, by the end of 2012.

Ferguson, who has been closely involved with the PCAOB's protracted negotiations with China over audit inspection rights, advised against putting too much importance on the deadline.

"We've had periods before where we ran over deadlines while trying to get things done," he said.

Tension has been building for months between Chinese authorities and the PCAOB about inspecting the work of accounting firms that audit the financial books of Chinese corporations listed on U.S. stock exchanges.

Most of this work is done by the legally separate Chinese affiliates of the world's Big Four accounting firms: Deloitte , KPMG, Ernst & Young and PricewaterhouseCoopers.

After a string of financial scandals involving U.S.-listed Chinese companies, the PCAOB is pushing the Chinese government for permission to inspect the work being done there by the affiliates. The Chinese government has refused.

As negotiations over the matter have dragged on, speculation has grown that the PCAOB might deregister the Chinese affiliates. Such a move could send shock waves through the ranks of multinational companies with operations in China, which use the same firms to audit those operations.

"Everybody's nervous and watching what's happening here," said Paul Gillis, a professor at Peking University's Guanghua School of Management who runs China Accounting Blog.

Hedge funds and other investors have been contacting the PCAOB in recent months to ask about the deadline on the 2009 rule, said a person familiar with the matter.

The U.S. Securities and Exchange Commission has also been pressing China over the auditing issue. The SEC's talks with China recently broke down.

"Something is coming to a head here," said Patrick Chovanec, associate professor at Tsinghua University's School of Economics and Management in Beijing.

Under U.S. law, any firm that audits or plays a major role in auditing a public U.S. corporation must register with the PCAOB, which inspects and reviews the work of auditors.

The PCAOB stopped approving new applications from audit firms in China in October 2010. According to the board, 13 firms in China and Hong Kong are overdue for inspection, including affiliates of the Big Four.

Ferguson declined to comment on whether a plan leading to deregistration of audit firms in China is being considered.

In late November, the PCAOB gave Chinese regulators a draft proposal outlining a plan for joint inspections.

Ferguson said the Chinese are reviewing it and had expressed interest in a meeting in 2013. "There is forward movement," he said. "The number of issues ... has been narrowed significantly."

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