China bean-counters should open their books.

Agenda-Setting Financial Insight.
June 20 2012 5:36 PM

China Bean-Counters Should Open Their Books

After a rash of accounting slip-ups, the U.S. Securities and Exchange Commission has put the world’s big four audit firms in a bind by asking their Chinese joint ventures for documents they will find it hard to hand over.

Photo by TEH ENG KOON/AFP/Getty Images

Life only gets tougher for global accountancy firms in China. After a rash of accounting slip-ups, the U.S. Securities and Exchange Commission has put the world’s big four audit firms in a bind by asking their Chinese joint ventures for documents they will find it hard to hand over, according to a source cited by Reuters. China hates cross-border meddling, but it may be counter-productive to throw accountants under the bus. 

Deloitte’s joint venture in China already faces a suit from the SEC for refusing to hand over documents relating to Longtop, one of China’s more spectacular accounting frauds of last year. The joint venture argued not only that the SEC couldn’t demand certain files, but that if it complied it might face punishment from China for disclosing “state secrets” - though it’s not clear why Longtop would have many of these. 

At worst, the SEC could strip the auditors of their ability to sign off accounts for companies listed in the United States. That would affect not just Chinese companies but also multinationals which rely on Chinese joint ventures to vet their local divisions. Those Chinese companies unable to find a U.S.-approved auditor - there are $66 billion worth of Chinese company shares listed on Nasdaq alone, according to Reuters data - may have to delist. 

For China, that might seem a small price to pay for defending the country from foreign snooping. Intervention of any kind is unwelcome. It has taken the U.S. accounting regulator years just to get a vague agreement that it can sit in on Chinese audit inspections. Chinese authorities may even consider U.S. delistings as a boost for domestic markets: a Shanghai exchange official has said Chinese companies are welcome to return home. 

The trouble is, despite China’s aspirations to create its own giant accounting firms, domestic bookkeepers still lack credibility. Chinese auditors have little practice at dealing with the quirky shareholding structures common to Chinese firms listing overseas. As China’s technology, banking and manufacturing sectors have already learned, the best way to get that experience is not to close down but to open up - at least in the beginning. Different treatment for accountants doesn’t add up.

Read more at Reuters Breakingviews.

John Foley is breakingviews' Greater China correspondent, based in Hong Kong. He previously wrote on mergers and acquisitions, capital markets, consumer goods, mining, and luxury.



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