As regulators clamp down on shoddy financial reporting and auditing that is creeping into U.S. capital markets from overseas, look for more middle-market alliances like the one forged recently between Bernstein & Pinchuk and Marcum.

Bernstein & Pinchuk is a regional firm with offices in New York and Beijing, and Marcum is a regional firm with offices mostly concentrated on the East Coast. Both firms are registered with the Public Company Accounting Oversight Board to perform audits for publicly held companies listed on U.S. exchanges, and both firms earned clean reports after their most recent inspections.

But Bernstein & Pinchuk is the firm with the boots on the ground in China, with three offices and about 30 clients for audits or audit-related services, said cofounding partner Drew Bernstein. As companies in China seek avenues into U.S. markets, opportunities for firms with U.S. expertise in China has grown, said Bernstein. He began opening offices in China in 2001 to capitalize on the growth.

The PCAOB has taken a dim view of audit work performed overseas by firms or auditors that have little knowledge of U.S. accounting and auditing rules. The board published Staff Audit Practice Alert No. 6 to remind registered firms that they can't simply wrap a U.S. opinion around an overseas audit report and have it sail through an inspection unscathed. The board alert called out firms that were issuing audit reports based on the work of another firm or by using the work of assistants engaged from outside the firm that were paying little heed to PCAOB standards.

Likewise, the Securities and Exchange Commission has taken note of financial statements that are prepared outside the United States by companies or individuals with little knowledge of or experience working with U.S. Generally Accepted Accounting Principles. When SEC staff reviews financial statements for companies that are almost entirely located outside of the United States, they are asking more questions lately about GAAP qualifications, said Angela Crane, associate chief accountant at the SEC.

She told a national conference of the American Institute of Certified Public Accountants last week that some companies assert they learned U.S. GAAP by attending conferences or searching the Internet. “We have not accepted this as sufficient support,” she said.

Bernstein said he's witnessed the scrutiny firsthand. During the firm's most recent inspection, PCAOB staff had plenty of questions about how the China-based audit work was performed, and who performed it. “They wanted to go through specific work papers with the managers, not only to understand the work papers, but to understand their English and their writing capabilities,” he said.