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Senator seeks discipline for Chinese auditors

Senator Schumer (D-NY) speaks to the media before voting on a bill allowing a rise in the debt ceiling on Capitol Hill
Senator Schumer (D-NY) speaks to the media before voting on a bill allowing a rise in the debt ceiling on Capitol Hill

By Sarah N. Lynch

WASHINGTON (Reuters) - A U.S. senator is calling on federal auditing watchdogs to discipline China-based auditing firms that refuse to submit to U.S. inspections, saying negotiations with the Chinese government have gone nowhere.

Senator Charles Schumer, a prominent Democrat on the Senate Banking Committee, laid out his concerns about a lack of oversight of China-based auditing firms in a November 22 letter to James Doty, the chairman of the Public Company Accounting Oversight Board.

"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," Schumer wrote. "I respectfully urge the board to take immediate disciplinary actions against Chinese audit firms that continue to refuse to cooperate."

The PCAOB declined to comment on the letter because it had not yet received it.

The U.S. Securities and Exchange Commission and the PCAOB have been in talks with the Chinese government to allow for joint inspections of auditing firms following a rash of recent accounting scandals.

The SEC sharpened its focus on the issue last year as dozens of China-based companies listed on U.S. exchanges began disclosing auditor resignations and bookkeeping irregularities.

Many of the accounting issues have arisen at so-called reverse merger companies, or U.S. shell companies that merge with foreign companies in China and elsewhere. Some of the companies in question, however, have also used more traditional front-door methods of entering U.S. markets such as initial public offerings.

The SEC and the U.S. Justice Department are both investigating accounting irregularities at U.S.-listed Chinese companies and their auditors. Earlier this month, the SEC charged one of the largest, Longtop Financial Technologies Ltd, with failing to file current and accurate financial reports.

The SEC is also locked in a court battle with Longtop's former auditor, Deloitte Touche Tohmatsu CPA Ltd, to get the firm to turn over books and records that may shed light on accounting irregularities.

The SEC and PCAOB have been hoping to strike a deal with the Chinese government to allow for joint overseas inspections, although a deal so far has proven elusive.

A meeting planned for October between the U.S. and Chinese regulators was canceled by the Chinese. In speaking with reporters earlier this month, Doty said the PCAOB is struggling over whether or not it should revoke the registration of China-based auditing firms if China will not permit the inspections.

Schumer, in his letter, said the PCAOB has already given the Chinese six years to negotiate and said he is not optimistic about getting results. He called the PCAOB's failure to take enforcement action "deeply troubling."

"The longer the board countenances this impasse, the greater the danger to American investors and U.S. markets," he wrote.

Schumer also said he is sending a separate letter to the SEC calling for companies to provide "upfront disclosure" if they are using China-based auditing firms.

(Reporting by Sarah N. Lynch; Editing by Tim Dobbyn)

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