For decades Chinese companies listed in the US could not be inspected in China, because the US regulator, the Public Company Accounting Oversight Board (PCAOB), did not get permission to work in China. Accounting professor Paul Gillis expects this might be changing fast, he writes on his weblog.
There are signs that a breakthrough may be near. This summer the PCAOB was allowed to inspect Deloitte in Hong Kong. Word on the street is that the inspection did not go well – Deloitte had few working papers in Hong Kong related to China engagements since those jobs are usually done by the mainland affiliate. That should have had the PCAOB raising questions about who is the principal auditor who should be signing the reports. Everyone I talk to at the accounting firms expects the PCAOB will be back next year to do inspections on the mainland. I expect an announcement of an inspection deal will be made during the state visit of Xi Jingping to Washington in the middle of this month.
Many Chinese companies have announced their intention to delist from US markets in order to seek a listing in China. The recent turmoil in the markets raises some questions about whether that will happen. I have also heard that Chinese regulators are aware of the moral hazard present in these companies delisting at low values and relisting at much higher values in China. I am told that they are considering allowing US listed Chinese companies to seek a dual listing in China. That could be a major win for investors, and the continued efforts of the SEC and the PCAOB to police this sector may provide the most important protection for shareholders, since I am skeptical that Chinese regulators will be up to the task of effectively rooting out fraud in these companies.
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