China and U.S. Will Meet to Improve Transparency of Chinese Companies

Financial regulators in the United States and China will meet in Washington next month to discuss the details of a major financial reporting agreement between the countries in May, according to Marcum Bernstein & Pinchuk LLP, an accounting firm with a major presence in both countries.

The two countries have been working for years on the issue of transparency and the auditing of Chinese companies that are listed in the U.S. Officials scheduled to attend the U.S.-China Strategic and Economic Dialogue, which will be held July 8-12, include U.S. Secretary of State John Kerry, U.S. Treasury Secretary Jacob J. Lew, China State Councilor Yang Jiechi and China Vice Premier Wang Yang.

U.S. regulators, including the Securities Exchange Commission, have been investigating several China-based companies for the last two years for acts of financial misconduct. PCAOB Chairman James Doty said the Board’s top reason for improving the accounting practices of Chinese firms is to protect investors.

Regulators in both the United States and China have spent two years working on a Memorandum of Understanding (MOU), a bilateral agreement between the countries, that would increase the credibility of Chinese companies in the United States by raising their accounting standards. The countries finally reached an agreement on May 24 to allow the U.S. Public Company Accounting Oversight Board (PCAOB) access to the accounting records of Chinese firms. In the agreement, the China Securities Regulatory Commission and China’s Ministry of Finance empowered U.S. regulators to look at audit documents in enforcement cases.

Drew Bernstein, Managing Partner of Marcum Bernstein & Pinchuk LLP, called the May agreement a “big step forward.” It does, for example, offer a way for Chinese auditors to comply with U.S. subpoenas, according to Bernstein. However, the May agreement left some unfinished dialogue between the countries. The purpose of the U.S.-China Strategic and Economic Dialogue in July will be for the two countries to finish discussing the details of that MOU.

In a news segment on China Central Network (CCTV), Paul Gillis, Professor of Peking Univ. Guanghua School of Management, anticipated that a “breakthrough” will occur in the July discussions. “A deal will be reached to allow the PCOB to join inspections, and for the SEC to get the working papers that it needs to see,” he said. CCTV said that improved accounting standards resulting from the bilateral U.S.-China discussions could lead to a “revival” in the Chinese IPO market.

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