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PwC’s Nally hopeful about China progress

May 7, 2012

PricewaterhouseCoopers CEO Dennis Nally sits between Eli Lily and Company Chairman and CEO John Lechleiter (L) and Singapore's Prime Minister Lee Hsien Loong (R) during the APEC CEO summit in Honolulu, Hawaii November 11, 2011. REUTERS/Chris Wattie

Big audit firms are hoping talks will resolve an impasse between Chinese and U.S. regulators over work papers of the firms’ Chinese subsidiaries.

Auditors landed in the center of an international spat last year when the U.S. Securities and Exchange Commission went to court to force a Chinese arm of Deloitte to hand over audit records on its China-based audit client Longtop Financial Technologies.

Deloitte runs the risk of violating Chinese secrecy laws if it gives audit work papers to the SEC – and so would any other audit firm that finds itself in the same situation.

“This is not about work papers per se; there are bigger policy issues that have to be resolved,” Dennis Nally, global chairman of PricewaterhouseCoopers, the largest of the Big Four accounting firms, told Reuters in an interview. “We’re right in the middle of something we don’t know how to deal with, frankly.”

Nally said PwC has been “engaged” with government officials in China and the United States to make sure they understand the position the firms are in. “This is really a policy-philosophical issue that has to be resolved more from a diplomacy standpoint than from a regulator’s standpoint,” he said.

The head of the main U.S. audit regulator, the Public Company Accounting Oversight Board, participated in annual talks between the United States and China recently, a sign that the audit impasse may have gotten the attention of higher-level government officials.

The Big Four firms certainly hope so. They see China as a crucial market, where the audit business is growing at a healthier clip than in mature markets such as Europe. Late last year, the global head of Grant Thornton, Ed Nusbaum also told Reuters that government officials at the highest levels needed to intervene to resolve the audit issues in China.

The impasse over work papers is not the only problem facing the Big Four. They also are trying to hash out an agreement that will allow them to continue auditing in China after existing joint venture deals expire this year. As the joint ventures expire, China is pushing the Big Four to turn over ownership of their Chinese arms to locally licensed partners.

PwC is participating in the talks, even though its joint venture agreement does not expire until 2017. Nally said the firms are near an agreement with Chinese officials that will provide for a transition period of several years before ownership of the firms has to change.

Some of the Big Four would have trouble finding enough locally licensed senior partners to take over ownership of their firms, but Nally said PwC is in a better position than most.

“We’ve been in China for such a long time that it’s less of an issue for us,” he said. “Our Chinese business is already significantly comprised of Chinese nationals.”

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