The Public Company Accounting Oversight Board (PCAOB) announced on May 4 that it entered into a Memorandum of Understanding (MOU) with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance (MOF). The announcements described the agreement as follows:
“The MOU establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in both countries’ respective jurisdictions. More specifically, it provides a mechanism for the parties to request and receive from each other assistance in obtaining documents and information in furtherance of their investigative duties.”
A casual reader might think this solves the regulatory problem with Chinese companies listed in the United States. It does not. The agreement addresses investigations after fraud has already occurred. Importantly, the agreement does not allow the PCAOB to perform its more important role of routine inspections of Chines auditors, as occurs in the United States. Investors deserve assurances that their investments are safe, not just that some investigation will occur after the moneys are already long gone.
I previously wrote about the need to underweight Chinese stock investments because of the lack of transparency and regulation of Chinese stocks. For example, this post summarizes prior advice and posts, including this article from two years ago. The current U.S.-China compromise, while progress, does not change my advice that Chinese stocks should generally not be rewarded with your investment dollars until the Chinese government allows full cooperation and inspection of the auditors in their country.