China Stocks

[abh3vt]

A very small step forward; Paul Gillis has an excellent analysis that shows this wasn't a substantial game-changer:

http://www.chinaaccountingblog.com/weblog/pcaob-deal-sec-next.html

According to the China Daily report, the PCAOB will be permitted to observe official auditor inspections in China, yet will not be permitted to observe detailed reviews of specific audits.

PCAOB inspections have two parts. First, the PCAOB reviews certain aspects of the firm’s quality control system. This is the part of the Chinese inspections that the PCAOB is being allowed to observe. The second, more substantive part, of the inspections includes reviews of certain aspects of selected audit work performed by the firm. Every audit is not reviewed; rather a sample of audits covering a range of partners and offices is selected. The review of individual audits is the most important part of a PCAOB review, and this is the portion that the PCAOB is not being permitted to observe in China.

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Closely related to the PCAOB inspection issue is the current standoff between Deloitte and the SEC over access to the working papers for Longtop Financial Technologies. In July, the SEC asked for and was granted a six month stay in the action against Deloitte in U.S. Federal Court on the basis of ongoing negotiations with Chinese authorities that the SEC hoped would lead to access to the working papers. The judge ordered the SEC back to court in January to report on the negotiations. If the negotiations fail, I expect the SEC will be asking the judge to sanction Deloitte. These sanctions might include barring Deloitte China from auditing U.S. listed companies and may prompt the SEC and the PCAOB to ban all Chinese CPA firms from U.S. audits. That could lead to the mass delisting of U.S. listed Chinese companies.

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I would also like to see the Chinese authorities actually prosecute some of the financial scams that have taken place here....but I'm not holding my breath. Until there are better financial protections for US shareholders in place, I doubt you will see many in this country want to own these Chinese companies long term.