Top U.S. market's audit watchdog gives gloomy forecast for quality bookkeeping at U.S.-listed Chinese firms

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WASHINGTON (Reuters) – An official with the U.S. Securities and Exchange Commission’s (SEC) accounting oversight arm on Thursday said it sees “no prospects” of being able to properly do its job overseeing disclosures and preventing accounting fraud in China, amid ongoing consideration by the Trump administration of how to stave off the possible investor risk.

The comments by William Duhnke, chairman of the Public Company Accounting Oversight Board (PCAOB), comes as the latest in a series of statements in response to pressure from the White House and lawmakers to reduce the perceived risks Chinese companies pose to U.S. investors.

“I have been actively engaged with the (Big Four accounting firms) about how, in the absence of access, do we make sure staff can ensure audit quality of U.S.-listed Chinese companies,” said Duhnke, who sat on a virtual SEC panel on the topic with other U.S. regulatory authorities.

“We must trust and verify, but we have no ability to verify in China, and no prospects to do so on the horizon.”

The SEC has been locked in a decade-long struggle with the Chinese government to inspect audits of U.S.-listed Chinese companies, and its accounting arm is still unable to access those critical records, it has said.

The PCAOB, which was set up by the 2002 Sarbanes-Oxley Act and is overseen by the SEC, is tasked with policing the accounting firms that sign off on the books of the nation’s listed companies. Its problems with Chinese audit quality have been festering since 2011, when scores of Chinese companies trading on U.S. exchanges were accused of accounting irregularities.

Chinese authorities have long resisted audit papers leaving China, making it hard for U.S. regulators to check the quality of audits of Chinese companies.

But a bill passed by the U.S. Senate which, if signed by President Donald Trump, would require U.S.-listed foreign companies to disclose levels of government control. It would also require that Chinese companies comply with U.S. oversight of their audits or potentially face being delisted.

Chinese firms accounted for about a third, or some $279 billion, of funds raised globally via IPOs in the past five years. About half of that was offshore of China, mostly through New York and Hong Kong floats.[nL4N2DL03X]

Amy McGarrity, the chief investment officer at the Public Employees’ Retirement Association of Colorado said that investors should have access to “ample” disclosures, but was worried restricting listing of Chinese companies could harm U.S. capital markets and force investors to private markets.