Auditing Spat Dividing U.S. and China Turns Ugly

Ongoing Disputes

Meanwhile, the dispute between CSRC and PCAOB, whose members include each of the five audit firms and their Chinese divisions, has also reached a boiling point.

Unless PCAOB officials and Chinese regulators settle before the end of December, the board may decide the auditors and their China divisions no longer qualify to audit Chinese companies that trade on U.S. stock exchanges, said Paul Gillis, a professor at the Peking University Guanghua School of Management.

And if the auditors are disqualified, Gillis said, the companies would have to delist for failing to meet a key SEC rule, which says every listed company must be regularly audited by a PCAOB-registered auditor.

PCAOB Chairman James Doty said the board would move unilaterally to protect investors if its discussions with CSRC officials failed to yield results.

Indeed, the board may have already taken action against the auditing firms, said a source close to the U.S. regulator, but has kept the moves confidential.

Each auditing firm has called for all parties to reach an agreement and end the regulatory conflicts dividing the United States and China.

A settlement would likely serve the best interests of the firms, too, which have been targets of SEC fire before.

For example, last May the SEC announced administrative action against Deloitte's Chinese affiliate for refusing to turn over financial documents related to its Chinese client Longtop Financial Technologies Ltd., a software company.

A few months later, SEC asked a U.S. court to subpoena the firm for the documents. A decision was still pending while the administrative proceedings continued, the SEC said.

In connection with the Longtop case, the CSRC in April had agreed to let SEC access some files on condition that the information was not used for legal action without the Chinese regulator's permission. SEC officials rejected that condition, though, and the CSRC likewise refused to budge.

For several months, Arevalo told the court, SEC officials stopped communicating with the CSRC about the case.

In November, though, it appeared a breakthrough was imminent. CSRC said it was considering standardizing procedures for foreign regulators seeking Chinese audits. CSRC then agreed to turn over a 10-page file on Longtop, but repeated the stipulation that none of the information could be used for legal action without its permission.

SEC officials rejected the file, saying it was only a fraction of what they wanted. And they refused to accept CSRC's terms.