US and Chinese finance officials are meeting in Beijing this week hoping to make progress on long-standing differences over how to oversee the auditing of Chinese companies whose shares are listed in US markets.
The meeting comes as questions over possible accounting problems at such companies overshadow fundraising efforts both in the US and in China.
US stock and auditing regulators were to meet yesterday with officials from the Chinese Securities Regulatory Commission and the Ministry of Finance.
Public Company Accounting Oversight Board chairman James Doty said he believed Chinese authorities shared the common goal of seeking to protect investors and ensure quality of audits.
“This meeting is the commencement of our accelerated efforts with the People’s Republic of China to forge a cooperative resolution to cross-border auditing oversight,” he said, speaking last week, before leaving for China.
Beijing has balked at allowing inspections required by US law to audit companies operating inside China, contending they would violate its sovereignty. However, progress through high-level economic talks has raised the likelihood of an agreement, said Paul Gillis, a professor of accounting at Peking University’s Guanghua School of Management.
“They may let them in jointly, with a team from the Ministry of Finance,” he said.
Gillis said that European officials had expressed similar concerns to the Chinese before agreements were worked out on oversight of auditors there.
Scrutiny of auditing has taken on greater urgency as US stock regulators and exchanges have suspended trading in more than a dozen Chinese companies whose shares were listed publicly through so-called reverse mergers, which involve the purchase of an existing public shell company.
Though many of such companies use US-based auditors, the US side has cited as a chief concern a lack of current, accurate information about the companies and their finances.
“Given the potential risks, investors should be especially careful when considering investing in the stock of reverse merger companies,” Lori Schock, director of the US Securities and Exchange Commission’s Office of Investor Education and Advocacy, said last month in a statement.
According to the US accounting oversight board, as of March 31, 159 Chinese companies had listed shares in the US using reverse mergers since Jan. 1, 2007. Meanwhile, 56 companies had issued shares using more rigorously regulated initial public offerings.
Questions over some Chinese companies whose shares are traded on US markets gained attention as short-sellers began targeting such companies, driving their share prices sharply lower.
In some cases, the companies have fought back, complaining that the accusations of accounting fraud or other problems were unfounded. However, in others regulators have seen fit to suspend or delist the companies or at least investigate.
“There is a growing amount of concern over Chinese companies listed in the US through regulatory holes,” Gillis said. “It’s all coming together in a big storm now.”
China’s own share markets, barely 20 years old, are still dogged by complaints over insider trading, market manipulation and other abuses.
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