Chinese audit firms could be barred from vetting the accounts of US-listed companies because of a regulatory stand-off that has the potential to cause a significant trade dispute.
The US’s chief audit regulator has admitted that a mass exclusion of Chinese audit firms might be necessary, even though such a move could have a damaging knock-on effect for US multinationals active in China, such as General Motors.
James Doty, chairman of the Public Company Accounting Oversight Board, said the US would eventually have to act if China continued to prevent his staff from checking the work of Chinese audit firms.
The PCAOB has cleared 110 audit firms from China and Hong Kong to audit US-listed businesses with the expectation that it would one day be able to jointly inspect them with Chinese authorities.
But Mr Doty told the Financial Times that this arrangement could not be permanent if China persisted in denying it sight of key papers.
He said: “In my view, it is not tenable to continue indefinitely to allow Chinese firms to remain registered with the PCAOB if the PCAOB cannot inspect their US-related audit work.”
Chinese audit firms registered with the PCAOB include the local arms of the Big Four accountants – PwC, Deloitte, Ernst & Young and KPMG - and more domestically focused firms.
Their work has come under scrutiny following recent accusations of fraud against some Chinese companies listed in North America.
Paul Gillis, a visiting professor of accounting at Peking University, described a deregistration of Chinese audit firms as “the nuclear option” for the US.
It would prompt big Chinese companies to abandon US listings and also make it impossible for US multinationals to get their Chinese arms audited, he said: “That can’t be the solution. The solution has got to be found through diplomacy.”
Mr. Doty said he was hopeful a deal with China on joint inspections could still be reached. The Chinese finance ministry did not immediately reply to requests for comment. It has said it wants to work towards closer cooperation.
However, access for US inspectors has been a sticking point for several years, with Beijing seeing it as an infringement on sovereignty and a potential risk to state secrets.
The challenges auditors can face in China were illustrated two weeks ago by KPMG. It said it had been unable to obtain key documentation from a Hong Kong-listed client, China High Precision Automation Group, which argued releasing the information would violate state secrecy laws.
Additional reporting by Simon Rabinovitch in Beijing
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