From Meiyou Banfa to M&A – US-China Financial Audits and Reporting

China to share financial audit data once considered “State secrets”.

What a difference a year makes.

One of the more concrete developments to come out of last week’s US-China SED (Strategic Economic Dialogue) was the announcement that China would begin sharing audit information on Chinese companies listed on US markets or involved in specific cross-border investments.

The dramatic turnaround came almost exactly one year after SEC Chairman Mary Shapiro flew to Beijing in a failed effort to personally negotiate the release of financial data relating to several high-profile cases of fraud and improper reporting.  As recently as December 2012, many commentators feared a wide-spread delisting of Chinese firms from US exchanges – and there were also implications for international investments into domestically-listed Chinese firms. It was an intractable problem – Chinese basic law (State security) prohibited the sharing of financial information, while US securities law (SEC regulations and standards) required it. SEC Chairman Shapiro spent a big part of her last year in office trying in vain for some movement. Yet somehow, it didn’t seem to panic markets.

And now we know why. Beijing wants easier investment access to US companies and assets — so a day before the SED meeting, they made the unsolvable problem simply go away. Better information flows clear the way for Beijing to pressure Washington to make it easier for China to invest in US firms and assets. In US-China negotiation, yesterday’s intractable problem is today’s bargaining chip.

Management Lessons from the Financial non-Crisis

Skeptics question whether the financial impact of the thaw will be significant, but that remains to be seen. International managers, however, can take three important lessons away from this exchange.

  • Don’t lose your cool. Only novice managers get excited about Chinese politics. It’s hard to predict who will win – but you can be sure that whoever panics will lose. The Chinese side respects patience and flexibility. You’ll call it passive-aggressive manipulation when it is happening to you, but trying to rush the Chinese side into a binding decision is always a bad idea. Smile, slowly sip your tea and talk about the weather no matter how you feel.
  • Slow and steady wins. The Chinese have a habit of studying and talking a problem to death before they take definitive action. Maybe they don’t want to be seen as rash – or weak. Plan on moving ahead with many small steps. That means you have to plan accordingly. Break down your issue into incremental solutions so that it’s easy for the Chinese to compromise.
  • They solve the problems that matter to them. You’ve got to find a way to make your goals their problem – which often means making it their profit. Chinese decision-makers are much quicker to clear bottlenecks and find solutions when it helps them more than it helps you.

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The Audit Crisis in Headlines:

From the NY Times, 7-12-2012

In China, Little Urge to Audit the Auditors
By FLOYD NORRIS
Published: July 12, 2012

Optimism appears to be rising that the Securities and Exchange Commission can reach some sort of accommodation with Chinese authorities to get help in investigating a wave of frauds at Chinese-based companies. The deceits have humiliated auditors and money managers who trusted or vouched for the companies, while enriching short-sellers who spotted the frauds early.
But it is far from clear that all Chinese officials really want to surrender the control that comes from having exclusive access to information. China has forbidden audit firms — including affiliates of the Big Four — from sharing work papers with the S.E.C., which has taken action against a Chinese affiliate of Deloitte in two cases.
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From Bloomberg.com  12-4-2012

SEC Auditor Case Seen Jeopardizing Chinese U.S. Listings

By Joshua Gallu & Eleni Himaras – Dec 4, 2012 6:03 PM ET

U.S. regulators, in a move to sanction auditors for blocking investigations at China-based companies, have set a course that jeopardizes the listing of more than 100 stocks from the world’s most populous nation.
In a Dec. 3 enforcement action against the China-based affiliates of the Big Four accounting firms, the U.S. Securities and Exchange Commission escalated a three-year impasse between the two nations over whether auditors can share work documents with regulators investigating possible accounting fraud at companies selling securities in the U.S.

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From Reuters  7-11-2013

U.S. Treasury Secretary says China to hand audit work to SEC
WASHINGTON, July 11 | Thu Jul 11, 2013 6:47pm EDT

(Reuters) – Chinese regulators will hand over some audit documents of U.S.-listed Chinese companies to U.S. securities regulators, U.S. Treasury Secretary Jack Lew said on Thursday, a move that may thaw a dispute over multiple accounting scandals.
“China’s securities regulator announced that it will begin providing certain requested audit work papers to our market regulators, an important step towards resolving a long-standing impasse on enforcement cooperation related to companies that are listed in the United States,” Lew told at a press conference following two days of U.S.-China economic talks.
Lew’s comments come after a spokesman for the China Securities Regulatory Commission (CSRC) said earlier this week that China was ready to provide the documents to the U.S. Securities and Exchange Commission.
The SEC has been struggling for years to obtain audit work in China to assist its investigations into possible accounting fraud.

 

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