String of Chinese companies could leave US

Auditors feel strain of Sino-US stand off.

China faces a conundrum - either back down to US demands to inspect Chinese audit firms or risk further damaging the credibility of its companies and auditors abroad.

The long-standing feud between US and Chinese audit authorities, which has been simmering for the past few years, is coming to a head.

Last summer, nearly 30 audit firms were forced to resign from auditing Chinese companies listed in the US due to dodgy accounting and the exodus has continued since.

A lack of confidence in Chinese companies is diminishing the value of their stocks and leaving investors wary of pouring capital into unreliable accounts.

The US hopes to reach an agreement with China that would allow it to inspect Chinese audit papers of US listed companies.

So far, China has resisted US overtures, preventing Chinese firms from handing over audit papers. The world’s second largest economy does not like foreign powers meddling in its affairs and attempts by US authorities to place legal pressure on firms has hardened the resistance.

US law requires all firms that audit listed companies to undergo regular audit inspections by the US audit watchdog, Public Company Accounting and Oversight Board (PCAOB). Although the US has agreements with most jurisdictions that allow joint inspection, China is not the only exception. France, Denmark and Belgium also deny access but their companies are not embroiled in Securities and Exchange Commission (SEC) investigations.

To date, most of the attention had focused on one high profile case. Despite taking out legal action, the SEC has failed to retrieve audit papers from Deloitte’s Shanghai office in an investigation of software company Longtop Financial Technologies. Former Deloitte client Longtop falsified financial records and has come under the scope of US investigators.

It is understood US authorities have approached other Chinese firms for audit paperwork, including PwC.

The regulation tug-of-war places global accounting firms with Chinese offices in a tight spot.

Chinese law prevents them from directly dealing with other jurisdiction and all requests for audit papers must go through China’s Ministry of Finance, which so far isn’t playing ball.

At present, Mainland Chinese affiliates of global firms have 130 clients listed on US stock exchanges with Deloitte (48 clients), PwC and KPMG (28 clients each) top of the pile.

This number is already under threat.

Global firms are sensitive to the spread of reputational damage and would quickly drop a client (Chinese or otherwise) if they suspected it lacked credibility.

Firms may also start leaving Chinese clients if US government pressure begins affecting their US businesses.

What is clear is US authorities are losing patience with the impasse, although negotiations are ongoing.

If a solution isn’t found soon, Chinese firms could be banned from auditing US-listed companies. This could lead to a string of companies leaving US capital markets and heading back to Shanghai, or elsewhere.

A better outcome would be that US and Chinese authorities end the posturing and thrash out a mutually beneficial solution.

But don’t hold your breath.

Chinese companies face conundrum. Photograph: Getty Images.

Arvind Hickman is the editor of the International Accounting Bulletin.

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Why Angela Merkel's comments about the UK and US shouldn't be given too much weight

The Chancellor's comments are aimed at a domestic and European audience, and she won't be abandoning Anglo-German relationships just yet.

Angela Merkel’s latest remarks do not seem well-judged but should not be given undue significance. Speaking as part of a rally in Munich for her sister party, the CSU, the German Chancellor claimed “we Europeans must really take our own fate into our hands”.

The comments should be read in the context of September's German elections and Merkel’s determination to restrain the fortune of her main political rival, Martin Schulz – obviously a strong Europhile and a committed Trump critic. Sigmar Gabriel - previously seen as a candidate to lead the left-wing SPD - has for some time been pressing for Germany and Europe to have “enough self-confidence” to stand up to Trump. He called for a “self-confident position, not just on behalf of us Germans but all Europeans”. Merkel is in part responding to this pressure.

Her words were well received by her audience. The beer hall crowd erupted into sustained applause. But taking an implicit pop at Donald Trump is hardly likely to be a divisive tactic at such a gathering. Criticising the UK post-Brexit and the US under Trump is the sort of virtue signalling guaranteed to ensure a good clap.

It’s not clear that the comments represent that much of a new departure, as she herself has since claimed. She said something similar earlier this year. In January, after the publication of Donald Trump’s interview with The Times and Bild, she said that “we Europeans have our fate in our own hands”.

At one level what Merkel said is something of a truism: in two year’s time Britain will no longer be directly deciding the fate of the EU. In future no British Prime Minister will attend the European Council, and British MEPs will leave the Parliament at the next round of European elections in 2019. Yet Merkel’s words “we Europeans”, conflate Europe and the EU, something she has previously rejected. Back in July last year, at a joint press conference with Theresa May, she said: “the UK after all remains part of Europe, if not of the Union”.

At the same press conference, Merkel also confirmed that the EU and the UK would need to continue to work together. At that time she even used the first person plural to include Britain, saying “we have certain missions also to fulfil with the rest of the world” – there the ‘we’ meant Britain and the EU, now the 'we' excludes Britain.

Her comments surely also mark a frustration born of difficulties at the G7 summit over climate change, but Britain and Germany agreed at the meeting in Sicily on the Paris Accord. More broadly, the next few months will be crucial for determining the future relationship between Britain and the EU. There will be many difficult negotiations ahead.

Merkel is widely expected to remain the German Chancellor after this autumn’s election. As the single most powerful individual in the EU27, she is the most crucial person in determining future relations between the UK and the EU. Indeed, to some extent, it was her intransigence during Cameron’s ‘renegotiation’ which precipitated Brexit itself. She also needs to watch with care growing irritation across the EU at the (perceived) extent of German influence and control over the institutions and direction of the European project. Recent reports in the Frankfurter Allgemeine Zeitung which suggested a Merkel plan for Jens Weidmann of the Bundesbank to succeed Mario Draghi at the ECB have not gone down well across southern Europe. For those critics, the hands controlling the fate of Europe are Merkel’s.

Brexit remains a crucial challenge for the EU. How the issue is handled will shape the future of the Union. Many across Europe’s capitals are worried that Brussels risks driving Britain further away than Brexit will require; they are worried lest the Channel becomes metaphorically wider and Britain turns its back on the continent. On the UK side, Theresa May has accepted the EU, and particularly Merkel’s, insistence, that there can be no cherry picking, and therefore she has committed to leaving the single market as well as the EU. May has offered a “deep and special” partnership and a comprehensive free trading arrangement. Merkel should welcome Britain’s clarity. She must work with new French President Emmanuel Macron and others to lead the EU towards a new relationship with Britain – a close partnership which protects free trade, security and the other forms of cooperation which benefit all Europeans.

Henry Newman is the director of Open Europe. He tweets @henrynewman.

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