UPDATE 2-China to hand over documents for U.S. accounting probes

Wed Jul 10, 2013 2:49pm EDT

* Could be second breakthrough in two-year accounting dispute

* CSRC says will give documents to SEC, PCAOB

* CSRC urges overseas regulators to punish short-sellers

* China, U.S. to begin high-level economic talks in Washington

By Samuel Shen and Dena Aubin

SHANGHAI/NEW YORK, July 10 (Reuters) - China's securities watchdog said it is ready to turn over audit documents of a Chinese company listed in the United States to U.S. regulators, signalling the latest breakthrough in a two-year international dispute over accounting scandals.

The U.S. Securities and Exchange Commission has been struggling to obtain papers from China to investigate possible accounting fraud at dozens of Chinese companies listed on U.S. stock exchanges. China has resisted for years turning over documents because of state-secrets and sovereignty concerns.

The China Securities Regulatory Commission (CSRC) is now ready to transfer audit papers to the SEC, and the Public Company Accounting Oversight Board (PCAOB), a CSRC spokesman said, confirming local media reports. He did not identify the company in question, or say when the handover will take place.

The gesture reflects China's willingness to improve co-operation with U.S. regulators, coinciding with high-level bilateral economic talks in Washington. It could also help restore confidence in China-based companies listed on U.S. exchanges and make it easier for firms in China to start tapping American capital markets again.

"If the SEC and CSRC are indeed singing from the same songbook on this and have found a way to resolve their stand-off over Chinese audit work papers, the capital markets will be safer for investors and a new era of cross-border comity between the world's leading economies may have dawned," said William McGovern, a partner at Kobre & Kim law firm in Hong Kong.

The stand-off between U.S. and Chinese authorities over accounting regulation has taken on an increasingly high profile, with global audit firms and major business groups and politicians calling for resolution.

The release of documents to the SEC would mark the second breakthrough in the accounting spat. In May, China agreed to turn over documents to the U.S. audit regulator, the PCAOB, under certain circumstances, though no papers have actually been transferred.

Giving the SEC direct access to documents would allow much broader investigations of accounting frauds. The PCAOB has oversight only of auditors, not the companies committing financial fraud.

The CSRC's decision was first reported by the official China Securities Journal and the Shanghai Securities News.

MARKET SHUTDOWN

The U.S. capital markets all but shut down to China-based companies after investors lost billions of dollars to alleged accounting frauds in China since 2010.

Scores of China-based companies have already been delisted from U.S. exchanges and new listings have slowed to a trickle.

The CSRC spokesman urged overseas regulators to punish ill-intended short sellers and protect the interests of overseas-listed Chinese companies and their shareholders.

The spotlight has also been thrown on the world's top five accounting firms, which audited the financial statements of the U.S.-listed Chinese companies.

In December, the SEC charged the Chinese affiliates of accounting firms Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young with securities violations for refusing to produce documents.

The firms said they could be prosecuted for violating state-secrets law if they released the papers. An administrative trial on the case kicked off on Monday.

The SEC did not immediately respond to a request for comment. It was not immediately clear how the release of documents would affect the SEC case.

"The timing is very interesting," said Brian Burke, counsel for Shearman & Sterling in Hong Kong. "Now on one side of the globe there is an apparent thawing of what has been a very tense relationship, and yet in the United States the SEC is still going full-steam ahead against the auditing companies without relenting."

The CSRC spokesman said that after papers are handed to U.S. regulators, there would be no legal basis to prosecute the accounting firms.

The matter is also expected to be addressed at the two-day U.S.-China talks in Washington starting on Wednesday.

One key unresolved issue is U.S. access to inspect audit firms in China.

Obtaining documents for SEC probes is a partial measure, but it will be difficult to prevent frauds without audit inspections, said Brian Fox, president of Confirmation.com, a Brentwood, Tennessee firm that provides confirmation services for audits.

"It's good to know in hindsight that fraud was happening but it doesn't do much good for U.S investors," he said.