By Sarah N. Lynch
WASHINGTON Feb 5 The top U.S. audit watchdog
said on Wednesday that the United States and China are close to
striking a deal that would allow Washington to inspect the audit
work of accounting firms in China.
Such a deal would alleviate a long-running dispute between
the two global powers regarding oversight of auditors, an issue
aggravated by a series of accounting scandals in recent years at
U.S.-listed Chinese companies.
The United States escalated the standoff last month when a
judge moved to temporarily suspend the Chinese units of the "Big
Four" accounting firms from practicing in the United States. It
has been unclear how that move would impact negotiations for a
"I am also optimistic that we will be able, during 2014, to
sign a long-sought agreement to inspect the audit work of
PCAOB-registered firms based in China," Jim Doty, the chairman
of the Public Company Accounting Oversight Board (PCAOB), said
in prepared remarks to the Securities and Exchange Commission.
The topic of China came up as part of a hearing before the
U.S. SEC to discuss the PCAOB's budget and 2014 policy
Later, in a conversation with reporters, Doty said the
Chinese and the PCAOB are still exchanging draft agreements and
have not decided how the inspections would be conducted.
Throughout the negotiations, the Chinese negotiators have
said they would not be comfortable with U.S. examiners
conducting the inspections on Chinese soil.
"Without commenting on what we think we are going to get,
there are various ways of dealing with that, including moving
the papers, making people available outside of China, conducting
inspections through other means," Doty said. "It may be that we
do not necessarily need to be on the ground."
He also struck a serious tone about the need to reach an
agreement soon. "Patience is limited for getting this solved,"
Doty said. "This is the end of the line."
The PCAOB and the SEC have been struggling for years to gain
access to work papers at audit firms in China, including units
of the "Big Four" firms, amid a burst of accounting scandals.
The scandals have affected dozens of Chinese companies traded on
U.S. exchanges, many of which were later delisted or
Doty estimated on Wednesday that more than 50 auditors have
also resigned after the accounting problems at these companies
The SEC has sued some of the questionable Chinese companies,
but it has complained that many of its investigations were
thwarted by the Chinese units of accounting firms including
PricewaterhouseCoopers, KPMG, Deloitte
, Ernst & Young, and others who refuse to
share their audit work.
They say such a move would violate Chinese secrecy laws.
The SEC and PCAOB contend access to the work is crucial,
both for investigating wrongdoing, and also to police the
quality of audit work through routine inspections.
The SEC eventually hit an impasse during talks with China,
and filed an enforcement action against the Chinese units of the
Big Four in late 2012, saying they were violating U.S. laws by
failing to hand over the audit workpapers.
The PCAOB has continued talks with the Chinese and in May
2013 were able to strike a deal to get access to audit work in
connection with investigations.
That deal, however, did not give the PCAOB the ability to
conduct routine inspections of the audit firms - a key
responsibility of the board to ensure the quality of the work.
Last month, the SEC prevailed in its case against the Big
Four, after an SEC administrative law judge sided with the
agency and ruled the audit firms were intentionally withholding
documents. The judge suspended the firms from practicing in the
United States for six months, but the suspensions will not go
into effect until the appeals process is exhausted.
Many observers had said they feared the ruling by the judge
could hurt the progress the PCAOB had made so far in its talks
with the Chinese.
Doty declined to comment on the SEC judge's ruling
Wednesday, or the impact it might have on his efforts.
He added, however, that he is hoping to make progress on a
deal before this year's annual U.S.-China Strategic and Economic
Dialogue in the summer.
Securing this agreement is crucial for U.S.-listed companies
and audit firms in China. If a deal falls through, it could lead
the PCAOB to deregister Chinese audit firms - an action that
would prevent them from signing audit opinions for U.S. listed