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US, China must cooperate to defuse confidence crisis

By Doug Young (Global Times)

08:17, May 14, 2012

The auditor for a Chinese firm whose collapse helped spark the current confidence crisis for US-listed China stocks is refusing to hand over related documents to government investigators probing the case, capitalizing on mistrust and lack of cooperation between the US securities regulator and its Chinese counterparts to impede the investigation.

The latest twist in this ongoing saga that began a year ago saw the Securities and Exchange Commission (SEC), which regulates US stock market, charge Deloitte Touche Tohmatsu's Shanghai office last week with failing to assist in a financial fraud probe against Longtop Financial, a Chinese financial services firm which collapsed last May after short sellers questioned its accounting.

Several months after Longtop's collapse, the SEC subpoenaed Deloitte in an effort to obtain some of the company's accounting documents, and was rebuffed by the accounting firm, citing Chinese law as the reason for its refusal.

In this and similar instances international auditors are exploiting a loophole in the complex system allowing Chinese firms to list in New York. That system has left the SEC and the Chinese securities regulator with little power to oversee and investigate these companies for technical and territorial reasons.

While the Chinese securities regulator has little or no power to oversee these companies, other Chinese industry regulators that do have such powers could step in and order them to hand over documents to the SEC; but none have done so yet, though it's unclear whether the SEC has sought their assistance.

In a bid to close this loophole, SEC officials traveled to China last July to meet with government officials to discuss better cooperation. Neither side commented on the results of those meetings, but it appears that little was accomplished, at least judging from this latest SEC action against Deloitte.

Meanwhile, opportunistic short sellers launched a barrage of attacks against other US-listed Chinese firms throughout last year, seeking to capitalize on the confidence crisis surrounding those companies. Some firms like Spreadtrum survived, but others like Sino-Forest were not so lucky and suffered similar fates to Longtop.

Although the SEC has taken a number of steps to halt this crisis, the impasse between the regulator and Deloitte spotlights the limits it faces when trying to conduct deeper probes into these firms - an obstacle it would never face from US-based firms that are required by law to hand over records or risk potential raids and arrests.

By failing to find a way to work together to address the problem, the US and China are giving auditors like Deloitte and their publicly traded clients a convenient excuse to avoid producing documents that could implicate the companies for fraud, and also the accounting firms for lax oversight.

If the two countries want to clean up this problem, they will need to find a way to cooperate to force companies and their accountants to live up to their responsibilities as publicly traded firms. Otherwise, the result could be a prolonged confidence crisis for all US-listed Chinese stocks that would benefit nobody.


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