A flurry of news is coming out of New York as we approach the Lunar New Year, bringing some relief for anxious Chinese companies and their auditors in their ongoing stand-off with the US securities regulator. In the second major development in that standoff this week, the US Securities and Exchange Commission (SEC) has dropped a lawsuit aimed at helping it get audit documents for a Chinese client of Deloitte Touch Tohmatsu‘s China unit. That should be good news for Chinese listed companies in New York and also for new IPO candidates, including software giant Kingsoft (HKEx: 3888), which has just announced plans for a New York IPO for its security software arm.
The dropping of the Deloitte lawsuit helped to spark a rally for several big-name US-listed Chinese firms. Those same companies saw a sell-off for their shares earlier this week after the SEC moved to ban the China units of Deloitte and the other 3 major US accounting firms from conducting audits on any US-listed company for 6 months. (previous post) Reports on the dropping of the Deloitte lawsuit pointed out that the 6 month ban was unrelated to this newer dropping of the Deloitte lawsuit, and that the ban could still be implemented if the SEC and Big 4 accounting firms fail to reach a broader document sharing agreement.
Still, the dropping of the lawsuit marked an improvement in the recent tone of hostility between the SEC and the Big 4, raising hopes that a broader settlement can be reached. That helped to lift shares of New York-listed Chinese companies like leading search engine Baidu (Nasdaq: BIDU), whose stock rose 3.5 percent, and top web portal Sina (Nasdaq: SINA), whose shares were up 2.7 percent.
The SEC’s tussle with the auditors revolves around access to their accounting work for US-listed Chinese firms. The SEC already has free access to such records for US-based companies that list in New York, and believes it should have similar access to such records for China-based firms that list in New York. But the accounting firms say they can’t share their audit work done in China because that could violate Chinese secrecy laws. They say the SEC needs to work with China’s securities regulator to reach a document-sharing agreement that would give the SEC access to the documents it wants.
The US reached such a landmark agreement with the China Securities Regulatory Commission (CSRC) last year, which helped the SEC obtain most of the audit documents it was seeking in relation to the case of failed Chinese financial services firm Longtop Financial. As a result, the SEC decided to drop the lawsuit it had previously filed against Deloitte, which was Longtop’s auditor. (English article) The SEC didn’t make any comment on its dropping of the lawsuit, including whether or not the move could help to ease tensions with the Big 4. I suspect that the Big 4 are working behind the scenes to move more in that direction, and that the SEC will ultimately abort its plan to ban the group from auditing US-listed Chinese firms.
Meantime, let’s look quickly at Kingsoft, one of China’s more entrepreneurial software companies, which has just announced it is spinning off its security software unit in preparation for a New York IPO. (company announcement; English article; Chinese article) There’s not much detail in the reports, though they note that Kingsoft wants to create 2 classes of stock similar to a structure being pursued by e-commerce leader Alibaba. That structure gives managers and other major stakeholders greater voting rights than holders of ordinary shares.
Kingsoft didn’t break out revenue or profits for its security software business in its latest reporting quarter, though it did note that its applications business posted healthy revenue growth of 78 percent to 270 million yuan ($45 million) partly due to strong growth in its Internet security business. There’s no timetable for the security software unit’s listing, but I would expect it could come quite soon, perhaps in the first half of this year, as Kingsoft tries to take advantage of recent positive sentiment towards China tech firms.
Bottom line: The SEC and big 4 auditors are likely to reach a new document sharing arrangement for audits of Chinese firms, while Kingsoft could list its security software unit in New York as early as the first half of 2014.