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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John McDonnell praises New Labour as he enters conciliatory mode

The shadow chancellor sought to build a bridge between the past and the present by crediting the 1997 government. 

Ever since Jeremy Corbyn became Labour leader, John McDonnell has been on a mission to reinvent himself as a kinder, gentler politician. He hasn’t always succeeded. In July, the shadow chancellor declared of rebel MPs: “As plotters they were fucking useless”.

But in his Labour conference speech, Corbyn’s closest ally was firmly in conciliatory mode. McDonnell thanked Owen Smith for his part in defeating the Personal Independence Payment cuts. He praised Caroline Flint, with whom he has clashed, for her amendment to the financial bill on corporate tax transparency. Jonathan Reynolds, who will soon return to the frontbench, was credited for the “patriots pay their taxes” campaign (the latter two not mentioned in the original text).

McDonnell’s ecunmenicism didn’t end here. The 1997 Labour government, against which he and Corbyn so often defined themselves, was praised for its introduction of the minimum wage (though McDonnell couldn’t quite bring himself to mention Tony Blair). Promising a “real Living Wage” of around £10 per hour, the shadow chancellor sought to build a bridge between the past and the present. Though he couldn’t resist adding some red water as he closed: “In this party you no longer have to whisper it, it's called socialism. Solidarity!”

As a rebuke to those who accuse him of seeking power in the party, not the country, McDonnell spoke relentlessly of what the next Labour “government” would do. He promised a £250bn National Investment Bank, a “Right to Own” for employees, the repeal of the Trade Union Act and declared himself “interested” in the potential of a Universal Basic Income. It was a decidedly wonkish speech, free of the attack lines and jokes that others serve up.

One of the more striking passages was on McDonnell’s personal story (a recurring feature of Labour speeches since Sadiq Khan’s mayoral victory). “I was born in the city [Liverpool], not far from here,” he recalled. “My dad was a Liverpool docker and my mum was a cleaner who then served behind the counter at British Homes Stores for 30 years. I was part of the 1960's generation.  We lived in what sociological studies have described as some of the worst housing conditions that exist within this country. We just called it home.”

In his peroration, he declared: “In the birthplace of John Lennon, it falls to us to inspire people to imagine.” Most Labour MPs believe that a government led by Corbyn and McDonnell will remain just that: imaginary. “You may say I'm a dreamer. But I'm not the only one,” the shadow chancellor could have countered. With his praise for New Labour, he began the work of forging his party’s own brotherhood of man.

George Eaton is political editor of the New Statesman.