January 11, 2012 / 6:56 PM / 8 years ago

Audit watchdog aims for China deal by late 2012

WASHINGTON (Reuters) - The top audit watchdog said U.S. and Chinese regulators must come to an agreement by late 2012 on joint auditor inspections, as a delegation from China began talks with officials in Washington.

James Doty, chairman of the Public Company Accounting Oversight Board, discussed the round of negotiations with reporters shortly after the U.S. Securities and Exchange Commission voted at a meeting on Wednesday to approve the PCAOB’s 2012 budget.

The SEC and PCAOB have been working with the Chinese to try to hash out a deal in response recent accounting scandals at several Chinese companies listed on U.S. stock exchanges.

In a number of cases, auditors have resigned after discovering accounting irregularities at the companies, some of which became listed on U.S. exchanges through a back-door process known as a reverse merger.

During the question-and-answer portion of the SEC’s open meeting, Doty told commissioners there are 36 China-based auditors which are issuing audit opinions and “have not performed the basic obligations.”

The SEC and Justice Department are investigating the accounting problems, and the SEC has taken a number of enforcement actions in this area.

“I’m confident of only one thing... it is in their interest to get to joint inspections. We will not be in a position to go forward and do what we should without some agreement,” Doty said. “If we are not inspecting in the fall in China, I am not optimistic about it.”

Later, an SEC spokesman confirmed that Chinese officials had met with their SEC counterparts on Wednesday.

The PCAOB, which was formed by the 2002 Sarbanes-Oxley Act to help police auditors, has been unable so far to convince the Chinese to grant its inspectors access they need to ensure that auditors are performing their duties.

Representatives from the SEC and PCAOB met with officials in China last July to discuss a solution, but the meeting was only a first step in the negotiations. The Chinese were supposed to come to the United States in late 2011, but canceled those plans.

SEC members voted 5-0 on Wednesday boost the PCAOB’s 2012 budget by about 11 percent over 2011 levels, to $227.7 million from $204.4 million.

Much of that increase will go toward expanding the PCAOB’s inspection program so it can increase the number of international inspections it performs, and so it can conduct inspections of broker-dealers under a new regime required by the 2010 Dodd-Frank financial oversight law.

Under Doty’s roughly one-year tenure, the PCAOB has tried to tighten the screws on the accounting industry.

The PCAOB is considering whether to limit the number of years an audit firm can work for the same client - an action that could break up some business relationships more than a century old. It also is considering forcing auditors to put their names on the audit reports attached to companies’ financial statements.

Most of the questions by SEC commissioners on Wednesday, though, focused on inspections and enforcement issues, including concerns about China.

“I recognize that foreign inspections raise significant challenges, and I appreciate the efforts the board has made to negotiate protocols with foreign authorities to facilitate inspections, but I am growing increasingly more concerned that the continuing gaps in oversight put U.S. investors at risk,” said Commissioner Luis Aguilar, a Democrat.

Reporting By Sarah N. Lynch, editing by Maureen Bavdek, Gerald E. McCormick and Tim Dobbyn

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