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China, U.S. pull together to eliminate stock regulation loopholes

29 Jul

BEIJING, June 28 (Xinhua) — China and the United States are working together to eliminate loopholes in their cross-border stock regulation system, as revelations of acts of fraud committed by some Chinese companies in the U.S. stock market have invoked criticism by investors.

The U.S.-based Public Company Accounting Oversight Board (PCAOB) is working with Chinese authorities to revise the cross-border auditing system, PCAOB spokeswoman Colleen Brennan told Xinhua during a recent interview.

The two sides are trying to establish a “meaningful inspection arrangement for Chinese auditing firms by the end of the year,” Brennan said.

Many Chinese companies enter the American stock market through reverse mergers, or mergers in which private companies buy large amounts of shares of public companies. This option allows Chinese companies to get around the strict financial scrutiny that is usually applied to initial public offerings (IPOs).

The auditing loopholes, then, have emerged from different auditing systems being used for reverse-merged companies.

According to the PCAOB, a non-profit corporation created in 2002 to oversee audits of public companies, the United States audited 74 percent of Chinese reverse-merged companies, while China-based auditing firms tackled 24 percent.

“Different jurisdictions produce totally different calculus. What’s more, some auditing firms in China are totally out of the sight of PCAOB,” said John Smith, who is working for a U.S.-based auditing firm.

More than 50 auditing firms in China are registered with the PCAOB.

These companies can audit other Chinese companies, but the PCAOB has no authority over them, according to a PCAOB report.

This makes it possible for some companies to falsify their financial statements in the absence of strict regulation, according to the report.

NASDAQ-listed China MediaExpress Holdings, Inc., China’s largest television advertising operator on inter-city and airport express buses, was questioned in January by Citron Research, a U.S.-based stock analysis company, over allegations of fraud.

Brennan said both countries have already recognized the loopholes in their respective jurisdictions and are working to close them.

Brennan said the PCAOB met with the China Securities Regulatory Commission (CSRC) during the recent U.S.-China Strategic and Economic Dialogue last month to “facilitate inspections of PCAOB-registered auditing firms in China.”

“Both sides have agreed to accelerate their efforts to close these loopholes. This will mean conducting negotiations and engaging in technical assistance activities to reach a bilateral agreement governing cross-border auditing oversight,” Brennan said.

However, it is already too late for several Chinese companies that have suffered in the wake of the allegations of fraud. Previously high-flying Chinese stocks are starting to crash.

Investors who have suffered losses as a result of the crash have joined together to file lawsuits against some of the companies.

“It may take years to settle lawsuits like these,” said David Wang, a partner of Simons & Simons, a law firm that focuses on international stock disputes.

Under the din of the crash, however, lies a deeper problem with the market. Investors based in both China and the U.S. believe that the market’s overall credit has suffered most from the regulatory loopholes.

According to the PCAOB, out of the more than 600 companies that were given access to U.S. exchanges through reverse mergers between January 2007 and March 2010, 159 were from China.

Brennan said the U.S. has sent a joint delegation from the SEC (Security and Exchange Commission) and the PCAOB to Beijing to discuss the inspection process and cross-border auditing oversight system for U.S.-listed Chinese companies.

“We have been trying to work through the concerns of Chinese authorities, as we have worked through similar concerns with authorities in other countries,” Brennan said.

The PCAOB recently completed similar negotiations with Switzerland and the United Kingdom.

“In these and other jurisdictions, the PCAOB has been able to successfully resolve issues pertaining to local law, sovereignty, and jurisdiction,” Brennan said.

According to the PCAOB, the recent agreements that it has entered into with the United Kingdom and Switzerland are not agreements based on mutual recognition, but are instead arrangements for cooperative joint inspections that have enabled PCAOB inspectors to evaluate auditing work being done in these countries.

“We are expecting to establish a meaningful inspection arrangement for Chinese auditing firms by the end of the year,” Brennan said.

A CSRC official who requested anonymity told Xinhua that a definitive agreement on auditing oversight will be made between the two countries.

“We are working together to solve the issue. The agreement will probably be made in the near future,” said the official.

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Posted by on July 29, 2011 in Finance

 

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