China quizzes audit giants on foreign regulator contact
China's financial regulators have asked the world's biggest audit firms to conduct an urgent review of their work on U.S.-listed Chinese companies and provide them with details on information they may have provided to overseas regulators, two sources told Reuters.
The move is set to ratchet up tensions between the financial regulators of America and China following a string of accounting scandals at U.S.-listed Chinese companies.
Last month the U.S. Securities and Exchange Commission (SEC) asked an American court to enforce a subpoena it sent to Deloitte Touche Tohmatsu's China practice for work papers from its audit of scandal-hit Longtop Financial Technologies Ltd.
Two sources from the audit industry told Reuters that the Ministry of Finance and China Securities Regulatory Commission (CSRC) met with the so-called 'Big Four' audit firms -- KPMG, PricewaterhouseCoopers, Ernst & Young and Deloitte -- along with two smaller firms last week.
The firms were requested by the government to conduct an urgent review of all audits they had done on U.S.-listed Chinese firms in 2010 along with work on U.S. initial public offerings by Chinese companies.
They have been asked to report back by the end of this week with information on whether audit work papers or other client information were given to overseas regulators or any of their overseas practices.
One source, who can't be named due to the sensitive nature of the meeting, said the Chinese authorities reiterated to the firms their rules on confidentiality.
"We are being asked to give that message to foreign regulators that seek to get information from us," the source said.
The second source said that the information requested included all correspondence on U.S.-audit work between the firms' mainland Chinese offices and their counterparts in Hong Kong and Macau. Firms have also been asked to provide details of audits done by their Hong Kong offices on U.S.-listed Chinese companies, provided their main operations are on the mainland.
The request is understood to have been made to verify that auditors are abiding by China's confidentiality rules for accountants. However it's being seen as a direct response to the move by the U.S. regulators in the Longtop case and to ensure that firms do not succumb to pressure to hand over documents to other regulators.
"Given what's happened in the States recently with the SEC ratcheting up the pressure, there was likely to be some sort of reaction and this is part of it, if not the total of it," said one industry expert who did not have direct knowledge of the meeting.
The CSRC and China's Ministry of Finance ministry had no immediate response when reached by phone. Reuters asked all of the 'Big Four' firms about the meeting. PWC, KPMG and Ernst & Young declined to comment while Deloitte did not immediately respond.
U.S. accountancy watchdog Public Company Accounting Oversight Board has been negotiating with the Chinese authorities to be allowed to conduct inspections of mainland firms that audit Chinese companies listed in America.
However, the momentum of the talks appears to have been slowing in recent weeks, with no date yet set for the next round of discussions.
(Additional reporting by Nanette Byrnes in NEW YORK and Don Durfee in BEIJING; Editing by Muralikumar Anantharaman)