The potentially damaging dispute between China and the United States over accounting practices and access to audit records has now been dragging on for quite some time. Unlike many other issues between the two countries, accounting was never likely to rouse the kind of passions that normally accompany trade disagreements, international alliance structures, hacking or military affairs, even if the potential for disruption is very real and considerable, as Pacific Money reported last year.
This last week however, finally brought what seemed to be a glimpse of progress in the dispute.
Professor Gillis, who is currently at China’s prestigious Peking University’s Guanghua School of Management, and who is also a member of the US Public Company Accounting Oversight Board (PCAOB), announced on his excellent China Accounting Blog that for the first time that he was optimistic that progress was being made.
He quotes PCAOB Chairman Doty as saying “I am optimistic that we will soon be able to announce a protocol to exchange documents and other information necessary to enforcement investigations and disciplinary proceedings.” As Professor Gillis goes on to state, this would be a significant if not total step back from the precipice that may have resulted in a mass de-listing and significant problems for even US-listed companies dependent on China for a significant proportion of their revenues.
Although the deal is not finalized, and it is far from clear that all sides in the dispute will be fully satisfied by the document exchange “protocol,” at least this progress offers both sides a chance to step back from their positions and engage in more cooperative dialogue. In addition, a partial or total resolution in the US-China issue will probably lead to a similar progress in the parallel dispute between Hong Kong regulators and their Chinese counterparts.
Despite the optimism this proposed “protocol” suggests, some questions remain. The PCAOB in particular, will be making quite a compromise, since the documents that will presumably be shipped from China for inspection will first be filtered and possibly redacted. It will be hard for the PCAOB or foreign regulators to feel assured that these redactions are solely being done on the grounds of sensitive information relating to genuine secrets.
For China too, the agreement to allow such papers to be shipped overseas in any form also represents a significant compromise, as state secrecy laws, however extreme, were fairly clear that this was not permissible. So far, the new head of the China Securities Regulatory Commission (CSRC), Xiao Gang has a strong start in office. Not only has this US-China progress been achieved, but the CSRC is in the midst of a much needed crackdown on illegal and problematic practices in China’s markets.
The upcoming Strategic and Economic Dialogue (SED) between US and China will provide an ideal platform at which to announce the partial resolution, although it is probable that much negotiation is still to come. Nonetheless, this breakthrough will allow more time for the problem to be fully resolved.