FOR IMMEDIATE RELEASE: November 22, 2011
SCHUMER TO U.S. AUDIT WATCHDOG: TO PROTECT U.S. INVESTORS, BAR CHINESE ACCOUNTING FIRMS THAT RESIST OVERSIGHT
For Six Years, U.S. Regulators Have Been Stymied From Reviewing China-Based Audit Firms That Are Doing Work For U.S.-Traded Firms Chinese Officials Pulled Out of Negotiations With U.S. Regulators Last Month That Could Have Produced Agreement on Inspections Senator Calls For De-Registering Chinese Audit Firms, Says Failure To Crack Down Threatens Integrity of Financial Statements That U.S. Investors Rely On
WASHINGTON, DC—Today, U.S. Senator Charles E. Schumer called on the primary U.S. audit watchdog to deregister Chinese accounting firms that continue to resist independent regulatory inspections.
In a letter to the head of the Public Company Accounting Oversight Board (PCAOB), Schumer said “this standoff has gone on long enough,” referring to the Chinese government’s long-running refusal to allow U.S. inspectors to review Chinese-based auditing firms that are doing work for U.S.-traded firms. According to the PCAOB, close to 100 Chinese auditors, or China-based affiliates of U.S. auditors, have registered with the regulator to perform audit work for over 300 public companies with operations in China. PCAOB approved these firms to perform auditing six years ago on the promise that the firms would eventually submit to inspections. But China has consistently refused to let inspections occur, and even pulled out of a planned meeting last month to negotiate a resolution to the issue.
In his letter to James Doty, Schumer said PCAOB needs to take a harder line with China and stop vouching for China-based accounting firms that refuse to submit to any oversight.
“Six years with no resolution on this critical issue is unacceptable, and it is time for the Board to exercise its enforcement authority against Chinese audit firms that have not submitted to independent regulatory review,” Schumer said.
In the wake of accounting scandals a decade ago involving Enron, WorldCom and others, Congress established an independent watchdog, the Public Company Accounting Oversight Board, to regulate independent auditors of public companies. To ensure corporate financial statements are subject to tough, outside scrutiny, Congress also gave the PCAOB authority to take disciplinary action if auditors refuse to cooperate with inspections. Those sanctions include suspending or revoking an audit firm’s registration, which would preclude the firm from preparing or issuing any audit reports concerning any publicly-traded companies. It is this authority that Schumer is urging PCAOB to invoke against Chinese-based audit firms.
Schumer’s call comes after 24 companies doing business in China reported auditor resignations and accounting irregularities in a two-month span earlier this year. These and other irregularities have spurred anxiety among U.S. investors.
The PCAOB itself has expressed concern about the danger this lack of inspection poses for U.S. investors. To date, however, it has done nothing more than list the auditors and auditor clients that have never been inspected and issue a staff audit practice alert to remind registered firms of their obligations when working with other audit firms. The alert seems to have been prompted by the increasing numbers of companies based in China and Hong Kong accessing the U.S. markets via reverse mergers, which allowed companies to become publicly traded here without undergoing the rigorous SEC registration process by merging into a publicly traded shell company. However, merely listing uninspected auditors or putting out a staff alert clearly is insufficient. While the SEC did respond to the reverse merger scandals by halting future reverse mergers and increasing scrutiny on reverse merger firms already trading here, Schumer argued that these reverse mergers collapses are just the tip of the iceberg.
A copy of Schumer’s letter to PCAOB Chairman Doty appears below:
November 22, 2011
The Honorable James R. Doty
Public Company Accounting Oversight Board
1666 K Street, NW
Washington, DC 20006
Dear Chairman Doty,
I write today to express my concern about the Public Company Accounting Oversight Board’s continued failure to inspect Chinese audit firms. Close to 100 Chinese auditors, or China-based affiliates of U.S. auditors, have registered with the Board to perform audit work for over 300 U.S. public companies with operations in China. The Board’s failure to inspect means that American investors have no independent assurance that Chinese accounting firms’ audits on U.S. public companies’ operations in China comply with U.S. law. This is a serious problem that threatens to undermine public confidence in the companies’ financial statements.
It goes without saying that the integrity of public companies’ financial statements is critical to confidence in U.S. markets – whether those financial statements are prepared in the United States or in other countries. Yet, despite six years of Chinese audit firms’ refusals to cooperate in inspections, the Board has taken no disciplinary actions with respect to any of those firms. I recognize that the Chinese government is acting to obstruct the Board’s inspection of registered Chinese audit firms, but this standoff has gone on long enough. I respectfully urge the Board to take immediate disciplinary actions against Chinese audit firms that continue to refuse to cooperate.
In just a two-month span earlier this year, more than 24 companies doing business in China reported auditor resignations and accounting irregularities. Moreover, the Board itself has expressed concern about the danger lack of inspection of Chinese audit firms poses for U.S. investors. Yet the Board has done nothing more than list the Chinese auditors that have never been inspected, along with the names of their client companies, and issue an audit alert to remind registered audit firms of their obligations. The alert appears to have been prompted by the increasing numbers of companies based in China and Hong Kong accessing the U.S. markets via reverse mergers. These recent reverse merger scandals are case-in-point that failure to scrutinize Chinese audits can cost U.S. investors billions. More problematic is that the reverse merger collapses might just be the tip of the iceberg.
It has been ten years since the wave of corporate accounting scandals that began with the sudden and unexpected collapse of Enron Corp. In the wake of those scandals, Congress established an independent watchdog – the Public Company Accounting Oversight Board – specifically to regulate independent auditors of public companies. To ensure corporate financial statements are subject to tough, outside scrutiny, Congress also gave the Board explicit legal authority to take disciplinary action if auditors refuse to cooperate in inspections. Those sanctions include suspending or revoking an audit firm’s registration, which would preclude the firm from preparing or issuing any audit reports concerning any issuer. Despite this enforcement authority, and despite six years of Chinese audit firms’ refusals to cooperate in inspections, the Board has taken no disciplinary actions on any Chinese auditors. The Board’s failure to do what it was created to do – particularly in the face of Chinese corporate accounting scandals that have already cost U.S. investors billions – is deeply troubling.
I understand the Board has been negotiating the auditor inspection issue with China for over six years. However, as we have seen on other issues, years of discussions with the Chinese government generally fail to produce meaningful results. The Board was not created to merely alert the public to problems. Rather, the Board was set up as a watchdog to protect investors – to inspect and assess compliance with applicable securities laws to protect the interests of investors and further the public interest in the preparation of accurate audit reports. In the case of Chinese audit firms, the Board is failing to do its job.
Mr. Chairman, you recently conceded publicly that it is not tenable to continue indefinitely to allow Chinese audit firms to remain registered if the PCAOB cannot inspect their U.S.-related audit work. I agree. Six years with no resolution on this critical issue is unacceptable, and it is time for the Board to exercise its enforcement authority against Chinese audit firms that have not submitted to independent regulatory review. In a separate letter, I am asking the Securities and Exchange Commission to require upfront disclosure by public companies that use China-based audit firms while we wait for the Board to do its job. The longer the Board countenances this impasse, the greater the danger to American investors and U.S. markets.
Thank you for your attention to this important matter. I ask that you please keep me apprised of developments.
Charles E. Schumer
United States Senator