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US-China auditing agreement to boost corporate transparency

06-25-2013 16:36 BJT

It has been a year-long seesaw battle between Chinese and US financial regulators on access to accounting documents of US-listed Chinese companies. A sign of relief went through the market earlier this year when a deal was reached.

Legal experts hope the US-China Strategic Economic Dialogue - held from July 8 to 12 in Washington - will hammer out the remaining details. With more transparency and better accounting standards, some say a revival in the Chinese IPO market is just around the corner.

For more than two years, US and Chinese regulators have been in a deadlock over how to oversee the auditing of China-based companies that list and trade on US stock exchanges.

Finally, a major breakthrough.

On May 24, the US Public Company Accounting Oversight Board, the China Securities Regulatory Commission, and China’s Ministry of Finance announced an agreement that will allow US regulators to obtain audit documents for enforcement cases.

"There are a lot of gaps in this MOU right now. But I think we have to look at it as it stands today, it is a tremendous accomplishment. They have been working on it for a number of years, there have been many challenges on both sides, I think it spells out how to re-establish the credibility of Chinese companies," Drew Bernstein, Managing Partner of Marcum Bernstein & Pinchuk Llp, said.

The move is hoped to improve the accuracy of audit reports at Chinese firms, increase transparency in accounting, and promote investor confidence.

But there are still plenty of lingering issues regulators need to agree on. Further progress is expected over the next few weeks.

"The next big meeting is the strategic and economic dialogue meeting between the United States and China which will take place on July 8th in Washington. At that meeting, there will be a breakthrough and 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," Paul Gillis, Professor of Peking Univ. Guanghua School of Management, said.

Probably the most important aspect of the agreement is... It might reignite the frozen Chinese IPO market.

At least two high-profile Chinese internet companies are expected to plan IPOs in the US this year: Chinese online retailer Jingdong Mall and travel website Qunar.

Gillis said, "We’re starting to see some interest in the IPO market, maybe the IPO window will open again, and I think everybody hopes so, because there is an awful amount of money locked up in China right now by investors who need have an IPO in order to exit their investments."

At the headquarters of Baidu, China’s largest search engine, in the Haidian District in Beijing. Although the company says it hasn’t faced any real risks prior to the agreement, it says it will make transparency and financial disclosure much easier.

The Nasdaq-listed firm also agrees that we are likely to see a pick-up in IPOs, but says that more factors need to be taken into account.

Jennifer Li, Chief Financial Officer of Baidu, said, "This progress definitely lifts one of the overhangs that inhibit some of the potential high quality companies to go to the US market. I believe this development itself is good for investors to get more comfortable with Chinese companies. But the issue of working paper controversy itself is not the sole driver that moves the IPO market in the US. The Chinese companies’ specific situation, the competitive landscape of the sectors they operate in, the macro economy as well as the health and the appetite of the US investors, those all come into play when it comes to the full speed of Chinese companies going public in the US."

In the meantime, analysts say the outlook for Chinese firms considering IPOs in the US market still hinges on whether a more concrete deal will be reached at the US China Strategic Economic Dialogue next month.


Editor:James |Source:

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