October 4, 2011 / 3:16 PM / 8 years ago

UPDATE 3-U.S. watchdog warns on China's accounting debacle

* PCAOB chairman expresses impatience with China

* Still hopeful of China inspections (Adds byline, details from speech, background)

By Dena Aubin

Oct 4 (Reuters) - The main U.S. watchdog for corporate auditors on Tuesday expressed impatience with Chinese regulators over not being allowed to inspect auditors there and warned that time to reach a deal may be running out.

Though the United States remains hopeful of forging an agreement on inspections, authorities “cannot sit back and wait indefinitely,” said James Doty, chair of the U.S. Public Company Accounting Oversight Board.

If the Chinese do not agree to joint inspections, “we will have to consider using the tools we have at our disposal, and which the Congress gave us for this purpose, to protect investors,” Doty said in prepared text for a speech delivered in Washington, D.C.

Through a spokeswoman, Doty declined to elaborate on his comments. The PCAOB has the authority to impose a variety of sanctions on auditors that do not cooperate with inspections, including revoking their registration.

Lynn Turner, a former chief accountant for the U.S. Securities and Exchange Commission, said deregistering China-based auditors that check the books of companies listing in the United States is the only response Doty can make if China does not cooperate.

“I hope he does it sooner rather than later,” Turner said.

Doty’s statement came a day after his spokeswoman confirmed that no date has been set for a second round of talks that was expected to take place this month between U.S. and Chinese regulators over joint auditor inspections. The two sides met in Beijing in July.

The China Securities Regulatory Commission and China’s Ministry of Finance were not immediately available for comment.

FRUSTRATIONS MOUNT OVER DEBACLE

Created after the Enron scandal by the 2002 Sarbanes-Oxley Act to police and inspect audit firms, the PCAOB has been trying to gain access to China to inspect auditors of companies based there that sell shares in the United States.

U.S. investors have lost billions of dollars on China-based companies selling shares on U.S. exchanges after concerns were raised about their accounting, prompting lawsuits and a broad investigation by the SEC.

Chinese regulators have resisted opening their country to U.S. inspectors on the grounds that it would infringe on their authority. U.S. regulators have also been thwarted in attempts to gather evidence in China, as auditors fear violating China’s secrecy laws if they turn over documents.

In another sign of mounting frustrations over the accounting debacle, the SEC last month filed an enforcement action against the Shanghai arm of accounting giant Deloitte Touche Tohmatsu for failing to produce audit work papers for a company the SEC is investigating.

The PCAOB has not yet revoked any auditor registrations due to being barred from inspections, though it has stopped accepting new registrations in countries where it does not have access.

Chinese accounting scandals have involved mostly small companies, but audits at large, multinational companies are also a concern, Doty said at a conference of the National Association of Corporate Directors.

Many of the largest firms have at least half of their audits conducted abroad, and PCAOB inspectors have identified “considerable room for improvement” in some of those audits, he said.

“This should be a concern for audit committees,” Doty said. “Fraud thrives in shadows.”

Doty also warned that audit committees of corporate boards should “think long and hard” before agreeing to reduced audit procedures to save costs. “Much less should audit committees be inviting or even pushing for that.” (Additional reporting by Rachel Armstrong in Beijing; Editing by Ted Kerr, Kevin Drawbaugh and Bernard Orr)

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