The US Public Company Accounting Oversight
Board (PCAOB) has issued a caution to US registered accounting
firms on audit of companies with operations outside the country,
particularly in China.

In a research note the PCAOB states that if a
company has accessed the US capital markets through a reverse
merger transaction, it may not be in accordance with PCAOB
standards.

The PCAOB research Activity Summary and
Audit Implications for Reverse Mergers Involving Companies from the
China Region (January 1, 2007 through March 31, 2010),
provides further information discussed in the caution Staff Audit
Practice Alert no. 6 issued on July 2010.

The PCAOB research found that the number of
reverse merger transactions in the study involving companies from
the China region was almost triple the number of initial public
offerings (IPOs), conducted in the US by companies from China
during that time. There were 56 IPOs from such companies,
representing 13 percent of the IPOs completed in the US.

The oversight body explained that
PCAOB-registered accounting firms based in the US audited 74
percent of the Chinese reverse merger companies, while China-based
registered firms audited 24 percent.

“Due to the position taken by authorities in
China, the PCAOB is currently prevented from conducting inspections
of the US-related audit work of PCAOB-registered firms in China,”
PCAOB said.

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PCAOB chairman James Doty said the research
note, together with the practice alert in July, “actively reaches
out to investors and other users of financial statements in order
to give them more information about the audit environment for
companies from the China region that may access the US markets
through reverse merger transactions.”

PCAOB director of research and development
Joseph St. Denis said the board hopes to add to the research data
published.