China quizzes audit giants on foreign regulator contract
China's financial regulators have asked the world's biggest audit firms to urgently review their work on U.S.-listed Chinese companies and give details on information they may have provided to overseas regulators, two sources told Reuters.
The unprecedented move, following a string of accounting scandals at U.S.-listed Chinese companies, is set to ratchet up tensions between the financial regulators of America and China.
The request, sources said, is seen as a direct response to the move by the U.S. regulators in the case of scandal-hit Longtop Financial Technologies Ltd, and to ensure that firms do not succumb to pressure to hand over documents to regulators outside of China.
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 documents from its audit of Longtop.
Two sources from the audit industry told Reuters that the Ministry of Finance and China Securities Regulatory Commission (CSRC) met last week with the so-called 'Big Four' audit firms -- KPMG, PricewaterhouseCoopers, Ernst & Young and Deloitte -- along with two smaller firms.
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 emphasized 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.
"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.
CAUGHT IN THE MIDDLE
The request is likely to heap more pressure on auditors caught in the middle of competing demands from the U.S. and Chinese regulators.
"I would guess they (auditors) are terrified," said Paul Gillis, a former partner for PWC and visiting professor of accounting at Peking University. "This is not a pleasant time for them and I think they would like to find a resolution to these problems as quickly as possible."
Gillis added that auditors may well have provided some information to the U.S. SEC in response to questions on listed Chinese companies, while the exchange of information with their overseas offices happens frequently.
"They (Chinese regulators) are going to learn, if the firms are honest about what they are doing, that they have shared a lot of information from China with foreigners," he said.
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.
Gillis said it was unlikely the big audit firms will face major sanctions for disclosing that they passed on information to their overseas offices or foreign regulators but will likely be told such behavior will not be tolerated in future.
U.S. accountancy watchdog Public Company Accounting Oversight Board (PCAOB) 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.
Earlier this month the PCAOB's chair James Doty said he could not wait indefinitely for an agreement and indicated they may consider taking alternative measures against audit firms that would not co-operate with inspectors.
(Additional reporting by Nanette Byrnes in NEW YORK and Don Durfee in BEIJING; Editing by Muralikumar Anantharaman)