Legal experts with a view of the regulatory standoff between China and the United States are placing little hope in a recent agreement between the two countries to end the stalemate.

The Public Company Accounting Oversight Board recently announced it has established a “memorandum of understanding” on enforcement cooperation with the China Securities Regulatory Commission and the Ministry of Finance in China. The agreement establishes a cooperative framework, the PCAOB said, for each country to produce and exchange audit documents relevant to investigations in the United States and China.

The PCAOB says the agreement creates a mechanism for each party to request and receive from each other assistance in obtaining documents and information related to investigations. PCAOB Chairman James Doty said in a statement the MOU is “an important step toward cross-border enforcement cooperation.” He said the board is hopeful it will be followed by an additional agreement to facilitate cross-border inspections of firms that are located in China and registered with the PCAOB to perform audit work that is relied on inside the United States.

According to the terms of the agreement, either country's authorities can request documents or information necessary to enforce or secure compliance with its rules. Prominent in the six-page agreement, however, are exceptions that allow either party to deny assistance, such as when a request would require a country to act in a manner that would violate its own domestic law or when there's an public or national interest to protect. Those are essentially the same reasons authorities in China already cite when they deny the PCAOB or the Securities and Exchange Commission access to firms or information held in China.

Jason Flemmons, senior managing director at FTI Consulting and a former member of the enforcement staff at the SEC, says the SEC has had similar agreements in place with authorities in China, even as it has sought investigative assistance into a string of failures in U.S. capital markets involving companies based in China. The SEC has pursued audit documentation from Deloitte, Ernst & Young, PwC, KPMG and BDO, so far without success. “Audit firms declined to produce materials directly to the SEC, and Chinese regulators declined to facilitate production of those materials, despite having these agreements in place,” he says.

Flemmons says it's possible authorities in China agreed to the recent MOU with the PCAOB as a way to set the stage for future cooperation, but he's skeptical. “If the Chinese firms were to produce materials and Chinese regulators were to facilitate that, that would be a sea change,” he says.

Deloitte already has petitioned federal court officials for relief from an SEC subpoena for audit work papers related to Longtop Financial Technologies on the basis of the recent PCAOB agreement with authorities in China. The firm has asked the court to dismiss the SEC's case against China and direct the SEC to obtain the information it needs through the PCAOB agreement. 

Drew Bernstein, co-managing partner with Marcum, Bernstein & Pinchuk, a New-York-based audit firm with affiliations in China, is more optimistic about the recent agreement. “It's a mechanism and a protocol for auditors to comply with subpoenas, so they don't have to risk losing their license,” he says. “It takes pressure off the industry.” He also believes the deal signals that it's at least possible for authorities in China and the United States to agree on something and potentially work together. “There were a lot of people who believed a deal could never be made,” Bernstein says.