Foreign and Military Affairs

China, US to close stock regulation loopholes

Updated: 2011-06-28 18:59
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BEIJING - China and the United States are working together to eliminate loopholes in their cross-border stock regulation system, as revelations of acts of fraud committed by some Chinese companies in the US stock market have invoked criticism by investors.

The US-based Public Company Accounting Oversight Board (PCAOB) is working with Chinese authorities to revise the cross-border auditing system, PCAOB spokeswoman Colleen Brennan told Xinhua during a recent interview.

The two sides are trying to establish a "meaningful inspection arrangement for Chinese auditing firms by the end of the year," Brennan said.

Loopholes emerge

Many Chinese companies enter the American stock market through reverse mergers, or mergers in which private companies buy large amounts of shares of public companies. This option allows Chinese companies to get around the strict financial scrutiny that is usually applied to initial public offerings (IPOs).

The auditing loopholes, then, have emerged from different auditing systems being used for reverse-merged companies.

According to the PCAOB, a non-profit corporation created in 2002 to oversee audits of public companies, the United States audited 74 percent of Chinese reverse-merged companies, while China-based auditing firms tackled 24 percent.

"Different jurisdictions produce totally different calculus. What's more, some auditing firms in China are totally out of the sight of PCAOB," said John Smith, who is working for a US-based auditing firm.

More than 50 auditing firms in China are registered with the PCAOB.

These companies can audit other Chinese companies, but the PCAOB has no authority over them, according to a PCAOB report.

This makes it possible for some companies to falsify their financial statements in the absence of strict regulation, according to the report.

NASDAQ-listed China MediaExpress Holdings, Inc., China's largest television advertising operator on inter-city and airport express buses, was questioned in January by Citron Research, a US-based stock analysis company, over allegations of fraud.

Brennan said both countries have already recognized the loopholes in their respective jurisdictions and are working to close them.

Brennan said the PCAOB met with the China Securities Regulatory Commission (CSRC) during the recent US-China Strategic and Economic Dialogue last month to "facilitate inspections of PCAOB-registered auditing firms in China."

"Both sides have agreed to accelerate their efforts to close these loopholes. This will mean conducting negotiations and engaging in technical assistance activities to reach a bilateral agreement governing cross-border auditing oversight," Brennan said.

However, it is already too late for several Chinese companies that have suffered in the wake of the allegations of fraud. Previously high-flying Chinese stocks are starting to crash.

Investors who have suffered losses as a result of the crash have joined together to file lawsuits against some of the companies.

"It may take years to settle lawsuits like these," said David Wang, a partner of Simons & Simons, a law firm that focuses on international stock disputes.

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