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WorldFebruary 1 2013

US and China reach stalemate over accounting practices

US authorities require Chinese companies listed in the US to abide by certain accounting standards. Many of these Chinese companies are unable to meet such demands because the information contained within their accounts is deemed to be a state secret. Recent fraud accusations involving Chinese companies have only served to highlight this problem, but any sort of resolution appears to be some way off.
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US and China reach stalemate over accounting practices

At one time, the common view in the US market was that if something was from China, it was good. Now sentiment has swung to the other extreme with fears that if it is from China, it must be bad. Investors have lost money, the US Securities and Exchange Commission (SEC) is enforcing transparency, and China is refusing to hand over the audit papers of its companies.

The dispute over accounting practices could be characterised as a regulatory power struggle between the US and the world’s new superpower. But it is much more than that, says Patrick Chovanec, associate professor of practice at Beijing’s Tsinghua University. When the US passed the Sarbanes-Oxley Act in 2002 it laid out accounting standards for all public companies in the US. “Those requirements set the table for a to and fro between US regulators and foreign regulators of all stripes. That kind of thing can be resolved or at least kicked down the road,” says Mr Chovanec. “What has really changed the dynamic is the fraud allegations. Investors lost large sums of money on Chinese stocks listed in the US under circumstances that demand investigation.”  

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