NEW YORK/WASHINGTON - US regulators may meet their Chinese counterparts in Washington this October to work on protocols for joint inspections of Chinese audit firms, the head of the main US audit watchdog group said on Wednesday.

The meeting would be the second round of high-level talks between US and Chinese officials in the wake of a recent rash of accounting scandals at Chinese companies listed in the United States.

Chinese companies have been punished in the capital markets because investors have no way of knowing whether audits can be relied upon, and Chinese regulators realize inspections would be mutually beneficial, James Doty, chairman of the Public Company Accounting Oversight Board (PCAOB), said in an interview.

"They're working with us to try to create a regime that enables joint inspections to go forward the way they are in Europe," Doty told Reuters.

Despite plans for a second round of negotiations, a key US Securities and Exchange Commission official told Reuters on Tuesday that the United States and China are still in the very early stages of their discussions.

"We're still at the stage of sharing information and building trust," said J.W. Mike Starr, a deputy chief accountant at the SEC who last month was one of nine US regulators to travel to Beijing for a two-day negotiating session on auditing oversight.

"Our goal is to have an agreement by 2012."

Reverse mergers raise stakes

The PCAOB, created by the 2002 Sarbanes-Oxley Act to police and inspect audit firms, has been trying to gain access to China for inspections as accounting scandals have soured US investors on shares of China-based companies.

Many of the companies in question have entered the US capital markets through a backdoor process known as a "reverse merger" in which they merge with a US shell company.

Problems with reverse mergers have raised the stakes as the SEC and PCAOB try to build a stronger working relationship with the Chinese Ministry of Finance and the China Securities Regulatory Commission. In doing so, they must work to convince the Chinese that conducting joint inspections of auditing firms will not infringe on China's authority.

But Doty believes some of China's concerns are beginning to melt as they realize that a "global economy puts a lot of limits on national sovereignty."

"We are long past the time when China could say that there's a good reason for not having any international inspection of audits based on vague principles of national sovereignty," Doty said. "They're not saying that now."

Fraud risks a challenge

The PCAOB also plans to soon publish a "practice alert" reminding auditors of the special challenges in emerging markets, including fraud risks, Doty said.

With all of the big audit firms practicing in China, "their names are on some pretty big audits and they have to be concerned that they refine and make more robust their fraud procedures," he said.

At the first series of talks in China last month, the Chinese and US spent most of their time explaining how each one conducts inspections of auditing firms. They were mostly engaged in a learning process, and did not get into the details yet for how joint inspections may work.

"I think it is early to start talking about a definite agreement when you are each still digesting the details of the respective inspection programs. They are digesting ours, we are digesting theirs," said the SEC's head of international affairs, Ethiopis Tafara, whose office is involved in the negotiations.

US regulators hope to start making plans with the Chinese for each country's regulators to tag along to onsite inspections. "That would be ideal," Starr said. "I think both we and they need to observe these inspections first hand."