* 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 and Sarah N. Lynch
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 deal would allow investors to find out after the fact
how they were defrauded but would do nothing to prevent the
fraud in the first place," said U.S. Senator Charles E. Schumer.
If a more complete agreement cannot be quickly reached, the
U.S. Securities and Exchange Commission should consider
de-registering Chinese firms, he said.
The pact was the result of more than two years of
negotiations between the Public Company Accounting Oversight
Board, the U.S. regulator for audit firms, and its counterparts
in China - the China Securities Regulatory Commission and the
Ministry of Finance.
Effective on May 10, it calls for the PCAOB to cooperate
with the CSRC and the Ministry of Finance on the exchange of
Any nonpublic documents exchanged will be kept confidential,
according to a memorandum of understanding between the agencies.
"We will be proceeding on a good faith basis that this is
going to open up some access to work papers for us," said PCAOB
Chairman James Doty. "It does not replace the duty of inspecting
audit engagements regularly."
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 will have no impact on a lawsuit filed by the U.S.
SEC against five top audit firms in China over their refusal to
turn over documents, said SEC Commissioner Luis Aguilar.
Under Friday's agreement, the PCAOB can share documents with
the SEC, but only if they were obtained for a PCAOB enforcement
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 that turning over the papers would put them
in violation of China's state secrets law.
Even if the SEC is able to get documents through the PCAOB,
it still faces hurdles in fraud investigations, attorneys said.
"For an enforcement case, the SEC would need to serve a
complaint on the accused, which may be extremely difficult if a
potential defendant is in China," said Jacob Frenkel, a former
SEC lawyer and now a partner at Shulman Rogers.
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.
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, the PCAOB's Doty said.
Negotiations are continuing with China over joint
inspections, Doty said.
Jason Flemmons, a senior managing director at FTI Consulting
who once played a leading role at the SEC in cases against the
China-based auditors, expressed skepticism about the deal.
"It could be that the Chinese are trying to change their
ways and enter into this agreement in good faith," he said. But
the SEC previously entered into similar agreements with China,
and China has yet to turn over documents covered by those deals,
Accounting firms welcomed the agreement.
"As PwC has always maintained, this has been an issue that
could only be resolved between governments,"
PricewaterhouseCoopers said in a statement on Friday.
KPMG global Chairman Michael Andrew praised the progress
made "through commonsense dialogue" among the regulators.
Edward Nusbaum, chief executive of global audit firm Grant
Thornton International, said many of his firm's Chinese clients
would like to do initial public offerings in the United States,
and this deal might make that easier.
"It's the first time we're seeing some major movement and
agreement between two regulators for such important economies,"