The auditor for a Chinese firm whose collapse helped to spark the current confidence crisis for US-listed China stocks is refusing to hand over related documents to government investigators probing the case, capitalizing on mistrust and lack of cooperation between the US securities regulator and its Chinese counterparts to impede the investigation. Regulators in both the US and China need to move beyond this kind of turf war and learn to work together to tackle these sorts of issues, or risk seeing the reputations and stocks of some of China’s most prominent entrepreneurial companies undermined for many years to come.The latest twist in this ongoing saga that began a year ago saw the Securities and Exchange Commission (SEC), which regulates US stock markets, charge Deloitte Touche Tohmatsu’s Shanghai office last week with failing to assist in a financial fraud probe against Longtop Financial, a Chinese financial services firm which collapsed last May after short sellers questioned some of its accounting. (SEC announcement) Several months after Longtop’s collapse, the SEC subpoenaed Deloitte in an effort to obtain some of the company’s accounting documents, and was rebuffed by the accounting firm, which all along has cited Chinese law as the reason for its refusal. In this and similar instances Deloitte and other international auditors are exploiting a loophole in the complex system allowing Chinese firms to list in New York. That system has left both the SEC and the Chinese securities regulator with very little power to actually oversee and investigate these companies for technical and territorial reasons. In a bid to close this loophole, SEC officials traveled to China last July to meet with government officials to discuss better cooperation, though it appears that little was accomplished. (previous post) While all this was happening, opportunistic short sellers launched a steady stream of similar attacks against other US-listed Chinese firms throughout last year, seeking to capitalize on the ballooning confidence crisis towards those companies. Some firms survived such attacks, but others were not so lucky and suffered similar fates to Longtop. The scandals went on to infect the entire sector of US-listed China stocks, causing their shares to plummet, and also cast a chill over the IPO market for Chinese companies looking to list abroad. The SEC has taken a number of steps to halt the confidence crisis, including launching several investigations like the one against Longtop. It has also worked to de-list shares of some smaller, more questionable Chinese companies that obtained their status by taking over existing publicly traded companies, a practice known as “back door listings.” But the impasse between the SEC and Deloitte spotlights the big limits the regulator faces when trying to conduct deeper probes into these firms – an obstacle it would never face from US-based firms. By failing to find a way to work together to address the problem, the US and China are giving auditors like Deloitte and their publicly traded clients a convenient and excuse to avoid producing documents that could implicate the companies for fraud, and also the accounting firms for lax oversight. If the two countries want to clean up this problem and restore confidence to the markets, they will need to find a way to work together effectively to force companies and their accountants to live up to their responsibilities as publicly traded firms. Otherwise, the result could be a prolonged confidence crisis for all US-listed Chinese stocks that would benefit nobody.
Bottom line: US-listed Chinese firms and their auditors will continue to evade regulatory scrutiny until the US securities regulator and its China counterparts learn to work together.
Related postings 相关文章:
◙ Deloitte, SEC Clash in New Confidence Crisis Chapter
◙ China, US Move to Ease Confidence Crisis 中美合作解决在美上市中国企业的信任危机
◙ Qihoo: The Next Accounting Victim? 奇虎360：下一个会计丑闻受害者？
of news the market doesn’t want to hear, as it would imply that perhaps Deloitte and other major accounting firms like PricewaterhouseCoopers may often have suspicions about US-listed Chinese companies’ accounting records, but simply stay quiet to avoid losing any business, obviously a huge breach of their responsibilities. Some old timers might remember that a much bigger accounting scandal in the 1990s over former energy high-flyer Enron ultimately brought down former major consulting firm Arthur Andersen. I doubt Deloitte or any other major accounting firms will face a similar shut-down from this latest confidence crisis. But I wouldn’t be surprised to see the major accounting firms going back to re-examine the books of their US-listed China clients, and perhaps a resignation or two as accountant for one or more of the larger listed companies in the next few months.
