The tug of war between China and the US on auditing Chinese companies listed in the US, got a strong pull from the US side, as the Public Company Accounting Oversight Board proposed new standards. Potentially a huge improvement writes accounting professor Paul Gillis at his weblog.
The Public Company Accounting Oversight Board has proposed new auditing standards that will significantly affect audits of US listed Chinese companies. The proposed standards address two of the problems with audits of US listed Chinese companies.
The first problem relates to the Big Four in Hong Kong signing off on audits that are mostly or completely done by the China member firm. I have called that practice consumer fraud – no different than a Wenzhou shirt maker sewing a made in Italy label on a garment. This practice has caused problems – most notably the case of Standard Water where EY Hong Kong signed off on accounts yet was unable to turn over working papers to SFC when demanded because it actually did not do the work. There is also the problem of some firms having their Hong Kong affiliate sign off US listings even where the work is done by the mainland firm.
The proposed standard makes it clear that, to act as lead auditor, an audit firm must itself audit a meaningful portion of the financial statements…
The second problem is the China offices set up by many smaller US CPA firmsthat enabled them to serve smaller US listed Chinese companies. Many of these firms have set up consulting wholly foreign owned enterprises (WFOEs) in order to employ local accountants and open offices. Auditing is outside the permitted business scope of these companies and none to my knowledge are licensed as CPA firms in China. The proposed standard may shut down this practice. It requires that the auditor obtain a representation from each other auditor that the other auditor is duly licensed to practice under the applicable laws of the relevant country or jurisdiction. Since the WFOEs are not licensed to practice auditing in China, I don’t see how they can make this representation.
These are good proposed standards that will improve auditing practices in China and help protect investors.
Are you interested in other stories by Paul Gillis? Do check out this list.