GEO Investing

By Melanie Lee

SHANGHAI | Thu May 19, 2011 5:57am EDT

(Reuters) – The U.S. audit watchdog expects an agreement with China later this year that will allow greater transparency of Chinese companies listed in the United States, its chairman told Reuters on Thursday.

Worries over accounting practices of some Chinese firms has been mounting among U.S. investors and has been cited as a reason for a plunge in shares of Chinese social networking site Renren following its initial public offering earlier this month.

The Public Company Accounting Oversight Board (PCAOB), which was created following the Enron scandal to oversee auditors of public companies and broker-dealers, has been lobbying China to allow U.S. inspectors check up on auditors of Chinese companies listing on U.S. exchanges.

James Doty, chairman of the PCAOB told Reuters, the breakthrough came during the U.S.-China Strategic and Economic Dialogue that took place in Washington last week.

“Both sides have agreed to accelerate efforts, including undertaking a process for negotiations and engaging in technical assistance activities, to reach a bilateral agreement governing cross-border audit oversight,” Doty said in an emailed statement.

“The hope and expectation is that the PCAOB’s discussions with the Chinese authorities in the coming months will provide the framework for a definitive bilateral agreement later this year.”

Chinese firms have come under scrutiny recently after a flurry of research reports analyzing a few of these Chinese “reverse merger” companies showed them to be scams. A reverse merger is a type of backdoor listing in which a foreign company merges with a U.S. shell company.

Renren shares fell below its IPO prices barely two weeks after it began trading after investors turned cautious on lingering accounting and regulatory issues.

Renren’s head of the audit committee resigned a few days before the company was due to start trading to protect the firm from a possible fallout from accusations of accounting fraud at another company where he is an executive.

Doty said earlier this month the PCAOB hopes that “significant progress” will be made in the coming months in talks with Chinese authorities.

Currently, Chinese companies need to have their books audited by a firm registered with the PCAOB to list on U.S. exchanges. Some U.S. auditors, however, have taken on Chinese clients, then farmed the work out to auditors in China without properly supervising them, the PCAOB warned last summer.

China had been reluctant to allow PCAOB inspectors into its markets, saying its own regulatory system was adequate.

The PCAOB recently reached arrangements with UK and Swiss authorities and will start doing joint inspections in those countries this month.

(Editing by Kazunori Takada)