The U.S. and China have struck an agreement giving U.S. accounting regulators access to documents from Chinese accounting firms.

Updated May 24, 2013, 1:08 a.m. ET

U.S., China Set Pact On Auditor Access

By MICHAEL RAPOPORT

The U.S. and China have struck an agreement giving U.S. accounting regulators access to documents from Chinese accounting firms. The deal, expected to be announced Friday, could help U.S. regulators investigate the auditors of U.S.-listed Chinese companies that might have been involved in accounting fraud. The agreement will allow the U.S. Public Company Accounting Oversight Board to see audit records and other documents held by Chinese audit firms. The China Securities Regulatory Commission and China’s Ministry of Finance will help the PCAOB obtain the documents. More than 100 Chinese companies listed in the U.S. have faced questions about their accounting and disclosure from regulators, auditors and short-sellers, and investors lost billions of dollars when those companies’ shares plunged.“This is a step in the interests of protecting investors,” PCAOB Chairman James Doty said.

The agreement doesn’t address or resolve a similar but separate dispute in which the Securities and Exchange Commission is demanding access to documents from Chinese audit firms, as it, too, probes possible fraud. Nor does the agreement allow the PCAOB into China for inspections of Chinese firms that audit U.S.-traded companies, which the U.S. regulator has pushed for.

Still, Mr. Doty said the agreement is a first step toward resolving those issues. It demonstrates that the Chinese are modifying their position on cooperating with U.S. regulators, he said, and “one could only regard it as encouraging.”

Chinese regulators, in a draft of their statement, call the pact “a significant step in China-U.S. audit oversight [and] cross-border enforcement cooperation.”

U.S. regulators have been investigating U.S.-traded Chinese companies for more than two years. The SEC has filed lawsuits against about a dozen Chinese companies alleging fraud or other misdeeds.

But U.S. regulators have been stymied in some of their investigations because the companies’ China-based audit firms have refused to turn over documents to U.S. investigators. They say Chinese law treats audit documents about Chinese companies as akin to state secrets, and that their employees could be jailed if they act without the Chinese government’s blessing.

In addition, China has refused to allow the PCAOB to inspect the work of Chinese audit firms to evaluate their performance and compliance with accounting rules, as they do for other firms that audit U.S.-traded companies.

In December, the SEC filed an administrative proceeding against the Chinese affiliates of five major accounting firms, insisting they follow U.S. law and cooperate with the commission. An SEC administrative law judge is hearing the case and is expected to issue a ruling by October. If the judge rules in the SEC’s favor, the firms could be stripped of their right to audit U.S.-traded companies.

While the SEC isn’t a party to the latest agreement, and the agreement doesn’t resolve the commission’s case against the five Chinese accounting firms, “the SEC of course knows what we’re doing here,” Mr. Doty said.

The agreement allows the PCAOB to share the documents it obtains with the SEC as long as it gives the Chinese advance notice of the sharing. But it won’t allow the SEC to use the PCAOB as a workaround to get documents that it couldn’t otherwise, Mr. Doty said.

In any event, he said, “we wouldn’t just make a request” for documents unless it was tied to the PCAOB’s specific mission of overseeing auditors. Forty-seven audit firms in China are registered with the PCAOB.