China-U.S. audit truce wisely avoids big issues
By John Foley
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
Deng Xiaoping used to say that ideological disputes were best left for future generations to solve. Audit authorities in China and the United States are wisely following the former Chinese leader’s advice. Their compromise on inspecting the audits of Chinese companies listed overseas, a non-binding memorandum announced on May 24, leaves the biggest questions unanswered. That’s exactly as it should be.
Chinese accountants will no longer find it so easy to claim that state secrecy prohibits handing over information on overseas-listed clients to the U.S. Public Companies Accounts Oversight Board. The audit watchdog will be able to request paperwork in fraud investigations, and China’s securities regulator and Ministry of Finance will, presumably with caveats, help procure it.
It’s a fudge, but the alternative was absurd. In December, the U.S. Securities and Exchanges Commission waded in by charging large auditors’ Chinese affiliates over their failure to present documents.
At a push, the SEC could have struck those auditors off, forcing companies to delist and stripping investors of billions of dollars of shareholdings. While the new accord doesn’t directly involve the SEC, it’s likely to be enough to call off the dogs.
The deal should also mean that U.S. capital markets stay open to Chinese issuers. Only one Chinese company, retailer LightInTheBox, has filed for a U.S. listing since November 2012. The dysfunction of domestic equity markets – which supplied just 1 percent of total company financing in the first four months of 2013 – helps explain the partial Chinese climb-down. This way, companies will have much better access to long-term foreign capital.
What of the underlying issues? China still hates the idea of foreign agencies meddling in internal affairs. The PCAOB thinks it should be allowed to conduct investigations on Chinese soil, but will have to wait to press that point. And the deal does nothing to allay concerns about China’s economic model, which often seems to value growth and glory more than fair play. But for now those fights are best left unfought – especially by auditors.