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Monday, 20 October 2014

Goodwill writedown

SEC learns true cost of China accounting goodwill

China’s shaky accounting practices are a sound target for U.S. regulators. Or at least, they would have been ten years ago. The Securities and Exchange Commission’s action against China-based auditors, including affiliates of big accountants like KPMG and Deloitte who refuse to hand over files on U.S.-listed companies, comes too late. If the SEC pushes the point, it could bring a moral victory, but a financial mess.

The SEC’s position is fair, but futile. Auditors say they can’t give up Chinese documents for fear of accidentally passing on state secrets. The power to release audit work performed in China resides with the securities regulator. Besides, under China’s loose definitions, auditors don’t always know what is a secret and what isn’t. American and Chinese authorities have been in talks for at least five years on closer co-operation, but with little progress.

By escalating the issue to a 300-day court review, the SEC may just prove that compromise is elusive. The SEC is effectively asking Chinese auditors to flout local law, or China to cast off its preoccupation with state secrecy. Neither is plausible. Starting a fight as China prepares to hand over power to new leaders, who may wish to score easy political points by swatting away attacks on the country’s sovereignty, looks especially unwise.

It didn’t have to be this way. Back in 2000, when Chinese companies like Sohu and Sina first listed on U.S. exchanges, a tough stance on accountability might have worked. Instead, regulators foolishly turned a blind eye, despite the obvious contradictions in China’s state capitalist model. Now the cost of taking a stand is high. Were the SEC to refuse to accept accounts audited by Chinese firms, it might leave even established Chinese companies with no choice but to delist.

A mass delisting is no longer far-fetched. It might even be welcomed in China, where executives and bankers talk misguidedly about the merits of companies “returning home”. State banks and wealth funds might be happy to help scoop up distressed stakes in companies like Baidu and Sina. As for the SEC, it would be left with the moral upper hand, a market free of Chinese accounting risk – and thousands of angry U.S. investors.

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Context News

Big audit firms’ Chinese affiliates were targeted by the U.S. Securities and Exchange Commission for refusing to hand over information relating to their clients, in an administrative order filed on Dec. 3.

Ernst & Young, KPMG, Deloitte, PricewaterhouseCoopers and BDO were all named via their Chinese joint ventures. The SEC can refuse to recognise audit firms, temporarily or permanently, if they are found to have broken U.S. rules or helped others do so.

The SEC filed a subpoena against Deloitte’s Chinese venture in September 2011 for failing to produce documents for an investigation into possible fraud by Longtop Financial Technologies, a Chinese company then listed in New York.

Deloitte argued in a filing on April 11 that handing over data directly to foreign regulators would be a violation of law in China, which could be met with “the severest of sanctions”, including dissolution of the firm and prison sentences for relevant partners.

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