China is issuing new rules requiring that a Chinese citizen head the China operations of the world’s big four auditing companies.
The announcement late on Wednesday came as regulators in the US and China clash over the sharing of audit information of China-based companies with shares traded in the US.
China’s Ministry of Finance said in regulations posted on its Web site that the big audit companies — Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG — must “localize” their staff in line with laws that specify the qualifications, ages and experience of their management.
The rules take effect by the end of 2017.
On Wednesday, the US Securities and Exchange Commission (SEC) charged a Chinese unit of accounting firm Deloitte LLP with refusing to hand over documents relating to a Chinese company under investigation for defrauding investors.
The SEC said Shanghai-based Deloitte Touche Tohmatsu CPA Ltd has not provided audit work papers that the SEC has been trying to obtain for more than two years.
“Foreign firms auditing US -issuers should not be permitted to shield themselves from regulatory scrutiny to the detriment of US investors,” SEC Enforcement Division director Robert Khuzami said.
Deloitte said that Chinese law prevented it from disclosing information about its client.
“Deloitte Shanghai is caught in the middle of conflicting laws of two different governments. This is a profession-wide issue and not one that is specific to Deloitte Shanghai,” the company said in a statement. “Accounting firms in China are not permitted to produce documents directly to any foreign regulator without Chinese government approval.”
The SEC said Deloitte’s refusal to provide the documents violates the Sarbanes-Oxley Act. The US law requires foreign public accounting firms to provide audit work papers for companies that issue stock in the US.
Auditors have been caught in the midst of a crackdown by US regulators on questionable accounting practices by some Chinese companies with shares listed on US markets.
Initially, the big audit companies, which dominate the market, were allowed to use foreign-qualified accountants in their China ventures.