By Dena Aubin

U.S. regulators have made another step in normalising relations with China on oversight of corporate auditing aimed at the many Chinese companies listed on U.S. stock exchanges.

U.S. officials for the first time have completed a round of observations in China of inspections of auditors by that country's regulators, and talks are expected by year-end between Chinese and U.S. officials on access to audit documents, a key aspect of the auditor regulation process, the top U.S. auditor watchdog told Reuters Thursday.

James Doty, chairman of the Public Company Accounting Oversight Board (PCAOB), said obstacles remain, but the upcoming talks could result in a "major breakthrough".

"The fact that it is a serious discussion with decision makers who are aware of the complexities of the issues on both sides is new," Doty said.

The PCAOB was formed by Congress a decade ago to police the auditing industry after a rash of U.S. corporate accounting blow-ups including the Enron scandal.

The Washington, D.C.-based board in recent years has reached formal agreements with many other nations on policing auditors that deal with U.S.-listed corporations overseas, but China has been a problem.

The PCAOB has been trying to gain access to China to address numerous accounting scandals at Chinese companies listed on U.S. stock exchanges. U.S. investors have lost billions of dollars on such companies amid questions about their financial accounts.

China has blocked the PCAOB's attempts to inspect audit firms there, but decided earlier this year to let the board inspectors observe Chinese authorities' own audit inspections.

SEC SEEKS DOCUMENTS

The first of the PCAOB observations took place in late October, but there is still no deal in sight to allow the U.S. to do joint inspections with the Chinese, Doty said.

The observations were a step forward in building confidence and credibility on both sides, Doty said.

China has also resisted the release of audit documents to the United States, citing its state secrets law.

Officials of China's Ministry of Finance and the China Securities Regulatory Commission are expected to travel to Washington before the end of the year to discuss the delivery of documents, Doty said. "These are very serious, significant steps for them to take, given where we started," Doty said.

The U.S. Securities and Exchange Commission, which has been trying to get audit documents from China for enforcement actions, will also be involved in the talks, he said.

Doty told Reuters last month auditors could be barred from checking the books of U.S.-listed firms if a deal on inspections is not reached next year.

Auditors that check books of U.S.-listed firms must be registered with the PCAOB, and open to inspections.

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