So Much for the PCAOB Inspecting Audit Firms in China

Welp. After years of negotiation and Chairman Jim Doty saying this past summer that the PCAOB was "very close" to reaching an agreement to inspect audit firms in China, this happened:

Last month, a final agreement that would have allowed a U.S. regulator to examine the audits of Chinese companies listed on American stock exchanges fell through, according to two people with knowledge of the matter. The failed negotiations are a setback for the Public Company Accounting Oversight Board, a Washington-based watchdog that has sought access to Chinese audits for years as dozens of companies such as JD.com Inc. and Alibaba Group Holding Ltd. raised billions of dollars from U.S. investors.

Apparently China wanted to restrict the inspections to such a degree that US officials decided "it wasn’t worth proceeding." University of Tennessee Professor and PCAOB Investor Advisory Group member Joseph Carcello told Bloomberg, "There is no obvious solution that doesn’t have serious side effects.”

China's been playing hardball so the devil in me wants the PCAOB to pull the registrations, just to see what happens. They'll never go that route, and you can't really expect the PCAOB to quit trying, otherwise the purpose of the entire body gets called into question.

I don't know what their Plan B is, but a month or so back, Paul Gillis mentioned this paper from Nemit Shroff of MIT that suggests "that regulatory oversight of the [non-US] auditor helps improve reporting credibility, which in turn facilitates corporate investment by increasing firms’ external financing capacity."

Gillis says that could happen in China as well:

The study suggests that these companies would have greater credibility in their financial statements if China were to permit the PCAOB to inspect the Big Four in China and Hong Kong. The benefits would extend even to Big Four clients not listed in the U.S.

If the PCAOB hasn't tried this line of reasoning, it might be worth a shot. If they have, then it's back to the drawing board.

Either way, China seems to prefer keeping its secrets rather than give in to a snoopy American quasi-government agency, regardless of the benefits.

U.S. Investors Have One More Reason to Fret About Chinese Firms [Bloomberg]

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