* U.S.-China deal reached after years of negotiations
* Deal will pave way for auditor enforcement actions
* U.S. had been blocked from probing Chinese audit failures
By Dena Aubin
NEW YORK, May 24 U.S. regulators will get access
to Chinese companies' audit documents under a deal announced on
Friday, opening the way to probes of bungled audits after a
two-year stand-off between China and the United States.
The nonbinding deal is only a partial victory for the United
States, which has been blocked from investigating accounting
scandals at dozens of Chinese companies listed on U.S. stock
It applies only to enforcement cases against auditors, not
against China-based companies suspected of accounting fraud. And
it does not allow U.S. regulators to do on-the-ground
inspections of auditors in China - a key part of efforts to
"This is a step in the right direction," said James Doty,
chairman of the Public Company Accounting Oversight Board, the
U.S. regulator for audit firms.
The agreement does not replace the need for the PCAOB to
inspect audit firms in China, he said.
Effective on May 10, the pact calls for the PCAOB to
cooperate with its counterparts in China, the China Securities
Regulatory Commission (CSRC) and the Ministry of Finance, on the
exchange of documents.
Any nonpublic documents exchanged will be kept confidential,
according to a memorandum of understanding between the agencies.
The signing of the memorandum "is a significant step in
China-U.S. audit oversight" and paves the way for cross-border
enforcement assistance between the two countries, the CSRC said
in a statement.
Investors have lost billions of dollars on Chinese companies
selling shares on U.S. exchanges in accounting scandals since
2010. Many of those companies have been booted from U.S.
exchanges, but hundreds still have shares trading in the United
The deal may not resolve a lawsuit filed by the U.S.
Securities and Exchange Commission against five top audit firms
in China over their refusal to turn over documents.
Under Friday's agreement, the PCAOB can share documents with
the SEC, but only if they were obtained for a PCAOB enforcement
The SEC in December charged the Chinese affiliates of
accounting firms Deloitte, KPMG,
PricewaterhouseCoopers , BDO and Ernst & Young
with securities violations for their refusal to
produce audit papers.
The firms said that turning over the papers would put them
in violation of China's state secrets law.
The PCAOB has been negotiating with China for more than two
years to get access to documents and permission to do joint
inspections with the Chinese.
China resisted out of concern about exposing state secrets,
triggering a high-stakes standoff and raising the risk that
China-based auditors would be deregistered by the PCAOB.
That in turn could have triggered massive stock exchange
delistings of China-based companies, which have to file audited
financial statements to meet exchange requirements.
Scores of U.S.-based multinational companies would also have
lost their ability to get their operations in China audited.
The deregistration of China-based auditors is not yet off
the table, because they have to be inspected to have the right
to audit U.S. companies, Doty said.
Negotiations are continuing with China over joint
inspections, Doty said.
Friday's agreement represents an important change in the
stance of Chinese authorities, Doty said. They likely realized
they need to be more transparent to have access to international
capital markets, he said.
"There were a lot of people who saw the unworkability of the
position in China that any kind of information or access to work
papers was somehow a breach of national security," Doty said. "A
lot people said that's just nonsense - no one believes that."