Casino Industry Suffering From China Denial Syndrome

I warned at re: The Auditors in July that the U.S. Securities and Exchange Commission and the audit regulator, the PCAOB, were publicly ignoring more important implications of their restricted access to Chinese auditors than the delisting of Chinese companies or the invalidation of the audits of Chinese companies.

The U.S. casino industry is already facing the worst case scenario.

The SEC can delist questionable Chinese companies or even all China-based listings that came through reverse mergers or more traditional means, as some have suggested it might do. That would be sad but not tragic.

According to The Financial Times as of late September:

Since the latter part of 2010, when alleged financial frauds and accounting issues began emerging in small Chinese companies that are listed on US stock exchanges, 67 China-based issuers have had their auditor resign and 126 companies have either been delisted from US securities exchanges or have stopped filing regular reports with the Securities and Exchange Commission.

The PCAOB can start doing something by observing audits in China, as recent announcements have suggested might finally happen. PCAOB Chairman Doty has even warned he may start de-registering audit firms, according to Reuters, if the situation with China is not resolved in the next year.

Reuters recently interviewed PwC's Global Chairman Dennis Nally on the subject. It was a disingenuous attempt by PwC to seem concerned about the regulatory stalemate. Seriously, folks. The Big Four audit firms do not for one "Hollywood minute" believe the PCAOB will deregister their Chinese member firms or any of the other member firms in other countries that restrict PCAOB inspections. A de-registration would render the audits performed by those firms unacceptable and invalid according to U.S. exchange listing standards. Dennis Nally knows that it's not just China-based companies that will have a problem with their audits if that happens.

The Big Four leaders only seem worried. When faced with its first test of will, the PCAOB punted. The audit regulator recently re-registered KPMG China, the first firm to reorganize to meet Chinese requirements to be majority owned and run by Chinese partners. Professor Paul Gillis of the China Accounting Blog wrote:

"The PCAOB has said that the transfer of an existing registration using Form 4 is only available where the successor firm is under substantially the same ownership as the predecessor firm. Obviously that is not the case here, since KPMG has designated so few partners to own the new firm."

It is extremely important, according to Gillis, that KPMG and the rest of the Chinese member firms of the Big Four and other global audit networks keep their old registrations as they reorganize their partnerships under the "localization" mandate. That's because, "the PCAOB announced in 2010 that it intends to reject any new applications for registration from firms in countries that will not allow PCAOB inspections."

Read this article in its entirety at the re: The Auditors, a blog by Francine McKenna.

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