Remember the post I wrote last week about the tiff between U.S. and China regulators concerning disclosure of auditor working papers? I don’t have an update for you, but there is a wrinkle here that I hadn’t thought about before. Actually, the entire issue wouldn’t have occurred to me at all if I hadn’t seen this blurb from an article in Reuters:
A dispute between U.S. and Chinese regulators over access to corporate audit documents is casting a lengthening shadow over U.S. stock markets, with some major U.S. firms now concerned that they could be drawn into a potential accounting crisis.
I haven’t written much about this dispute, since it revolves around some technical issues relating to the accounting profession. Expertise matters, and this issue is a great example of why that’s important. When I read that above blurb, I was confused. Why would U.S. companies worry about this issue, which primarily involves U.S.-listed Chinese companies? Was this a matter of potential retaliation by Beijing against U.S. companies with investments in China?
Not at all. It turns out that if the folks on the U.S. side of this (i.e., the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB)) put the hammer down, meaning among other things that the five accounting firms named by SEC last week as being in violation of U.S. law could no longer audit U.S. listed firms, that could effect more than just Chinese companies.
Why? I guess I wasn’t paying attention when I thought about this last week. These accounting firms would no longer be able to audit U.S. listed firms. Not just U.S.-listed Chinese companies, but any of ’em. Whoa.
As Thomas Shoesmith, a U.S. lawyer at PIllsbury, rather bluntly put it in a client newsletter:
If these five accounting firms are barred from practicing before the SEC, it seems certain that companies with major Chinese operations will find it difficult or impossible to find accountants.
Ah, now it becomes clear. And scary. Remember that the SEC smacked down the China branches of the Big Four (plus BDO) accounting firms last week. Who do you think hires these guys to do their China books? Right. So we’re looking at the possibility of quite a few multinational corporations, the ones with large China operations, not being able to get their audits done here. Kind of a big deal, yeah?
For the record, I still think a diplomatic solution is most likely here, but stay tuned.