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U.S. and China Reach Tentative Agreement on Audit Inspections

September 21, 2012, 6:01 p.m. ET

By MICHAEL RAPOPORT

U.S. and Chinese authorities have reached a tentative agreement to begin sending American audit-firm inspectors to China as observers—a step that regulators hope will help pave the way for full U.S. scrutiny of Chinese firms that audit U.S.-traded companies.

The U.S. and China have tentatively agreed on "observational visits" in which inspectors from the Public Company Accounting Oversight Board, the U.S. audit-industry regulator, would observe Chinese authorities examining and evaluating the work of their local accounting firms, accounting-board member Lewis Ferguson said in a speech Friday.

That would be a step toward potential joint inspections of the Chinese firms by both U.S. and Chinese inspectors, which the board hopes will begin next year.

Inspectors from the board conduct regular evaluations of audit firms that audit companies listed on U.S. markets, even if the firms or companies are located overseas. But the Chinese government has blocked the inspectors from scrutinizing Chinese audit firms, citing sovereignty concerns.

The board has said it needs access to the Chinese firms to protect U.S. investors: More than 100 Chinese companies have encountered questions over their accounting or disclosure, many of them audited by Chinese firms that the board hasn't been allowed to inspect.

Mr. Ferguson said he hopes the observational visits "will build trust and lead to further cooperation" between the U.S. and China, paving the way for full-blown participation by U.S. inspectors. The dates for the visits haven't yet been set.

Mr. Ferguson also said "difficulties remain" in the related attempt to resolve a standoff over whether U.S. regulators should get access to audit documents for Chinese companies they're investigating, though he was "hopeful" of a compromise.

The U.S. Securities and Exchange Commission is negotiating with Chinese authorities over its attempt to get Chinese audit firms to cooperate in probing suspected fraud.

The SEC has tried to get documents from Deloitte Touche Tohmatsu's Chinese affiliate concerning two Deloitte clients under SEC investigation, but Deloitte won't turn them over because it hasn't gotten China's permission to do so; China maintains tight control over information about its companies and could penalize Deloitte under strict state-secrecy laws if it cooperates with the SEC.

Mr. Ferguson noted if a Chinese audit firm doesn't cooperate with a U.S. investigation, regulators could bar it from auditing U.S.-traded companies. It is the first time anyone from the board has publicly raised that possibility, though the threat of "de-registering" an uncooperative Chinese firm has long been understood to be a potential weapon the U.S. could use if the impasse with China isn't resolved.

http://online.wsj.com/article/SB10000872396390444032404578010293911580874.html