US audit watchdog near China deal The US audit watchdog has reached a tentative accord with Chinese authorities to allow US accounting inspectors to observe audit activities in China. The agreement between the Public Company Accounting Oversight Board and Chinese government agencies could serve as the first step in granting US officials access to auditing papers for companies based in China. The PCAOB has long desired access to audit materials as part of its oversight of the audit industry, but has been frustrated by Chinese refusals. Under Chinese law, it is illegal to remove audit work papers from the country and Chinese authorities do not allow non-Chinese regulators to conduct inspections in China. "This would not be a substitute for a PCAOB inspection but would be a trust-building exercise between regulators," Lewis Ferguson, PCAOB member, said on Friday. We hope such exercises will . . . lead to further co-operation. 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 and the SEC have sought to investigate some of the audit firms involved with these companies but have been stymied by Chinese authorities. The rise of "reverse mergers," in which a non-US company acquires a US shell company to gain a listing on a US stock exchange, bypassing the regulatory scrutiny involved in a traditional initial public offering, has led to increased scrutiny of the companies" auditors. Some short sellers have targeted these companies in part because they reckoned that their US auditors were unable to properly monitor the companies" Chinese operations. The SEC and the Federal Bureau of Investigation have been investigating companies involved in reverse mergers. The PCAOB wants to eventually be able to issue inspection reports on China-based audit firms that prepare or heavily participate in audit reports filed in the US, Mr Ferguson said. Nearly 5 per cent of PCAOB-registered firms are based either in China or Hong Kong, comprising the largest group of non-US firms. Mr Ferguson cautioned that while US officials remained hopeful they would reach a final accord with Chinese authorities, "to date difficulties remain." "It remains uncertain where this dialogue will ultimately lead," he said.