The stand-off between financial regulars in the US and China, and the Big Four accounting firms might be over soon, expects accounting professor Paul Gillis, looking a a recent piece in the Wall Street Journal. Inculding a US$500,000 settlement fee for each of the four, he writes on his weblog.
I suspect that a deal is imminent between the US and China over audit and securities regulation. Given China’s recent proposal to clean up the VIE structure, I think China has decided it wants access to US capital markets and has decided to cooperate with US regulators and remove obstacles to US listings. Consequentially, I expect we will see a deal between Chinese regulators and the SEC and PCAOB before the settlement with the Big Four is finalized. US regulators would be foolish to let the Big Four off the hook before they get such a deal.
The penalty of $500,000 to each of the Big Four also makes no sense to me. If you accept the firm’s arguments that they were caught between a rock and a hard place when deciding whether to break either Chinese or US law, then no penalty would be appropriate. If you buy the judge’s argument that if the firms had found themselves in such a place because it was their own decisions (to accept clients when they knew that they might be breaking US law) that put them there, then the penalties need to be much larger. Penalties of $500,000 neither punish the firms nor deter bad behavior in such a lucrative market. On the other hand I believe the PCAOB shares some of the blame, since it should never have registered these firms to audit U.S. listed companies when the firms said they might not be able to comply with all aspects of US law.
Settlement of the regulatory problems and a fix to the VIE structure will go a long way towards removing some of the three terrors associated with US listed Chinese companies. If only someone can find a way to stop accounting fraud.
Are you interested in earlier stories by Paul Gillis? Check out this list.