US and China reach landmark audit inspection deal


Washington and Beijing have reached a landmark deal that would give US regulators access to audits of Chinese companies listed on US stock exchanges, in a deal that would halt the imminent delisting of about 200 stocks traded on Wall Street.

The announcement by US and Chinese regulators is a breakthrough in a long-standing deadlock. Beijing has not authorized foreign regulators to inspect audits of Chinese companies, citing a desire to protect state secrets. The US has said it will coerce New York-listed Chinese companies worth more than $1 trillion if they don’t adhere to US audit rules.

The Public Company Accounting Oversight Board, the American watchdog for accountants, said Friday it would have the power to select the companies, audit engagements and possible violations it inspects and investigates, without consulting Chinese authorities.

Under the agreement signed by the PCAOB, the China Securities Regulatory Commission (CSRC) and the Chinese Ministry of Finance, PCAOB inspectors could be on site in Hong Kong by mid-September to begin inspections, the agency said.

Despite the deal, US regulators were cautious about the deal’s success.

“Make no mistake though: The evidence will be in the pudding,” Gary Gensler, chairman of the U.S. Securities and Exchange Commission, said in a statement. “This agreement only makes sense if the PCAOB can actually inspect and investigate audit firms in China.

“Failing that, about 200 China-based issuers will face a ban on trading their securities in the US if they continue to use those audit firms,” he added.

The CSRC said the agreement “establishes a framework of cooperation in accordance with the respective laws of the authorities” and is “an important step forward for regulators in China and the US towards a solution to the control oversight problem related to on mutual interests”.

The agreement means that the work files of the Big Four accounting firms prepared in mainland China will be inspected by PCAOB officials in Hong Kong, according to people with knowledge of the details. Several people close to the matter warned that the pilot would have to run smoothly for the PCAOB to accept that China was compliant with US audit disclosure rules.

One of the people familiar with the matter — a senior banker close to a number of Chinese-American certificates (ADRs) — said an agreement was reached to conduct a test case before House Speaker Nancy Pelosi visited Taiwan. , but the announcement was delayed due to heightened nationalist sentiment in China surrounding the visit.

The CSRC met with the Big Four firms in Beijing on Thursday to discuss the potential compromise with PCAOB audit requirements, said a second person close to the matter, a portfolio manager at a global asset manager.

JPMorgan Chase held a phone call with clients in Asia and Hong Kong on Tuesday to discuss the status of the audit negotiations, a person who attended the call said. One person on the call said Liu He, the Vice Premier of China, had prepared a consultation paper that would give the PCAOB full access to Chinese audit files, and that it had been communicated to US and Chinese regulators.

A senior financier in Hong Kong, who is close to a number of Chinese tech groups, said the solution has been “held back by liability claims from auditors” in recent weeks, prompted by concerns over an increase in shareholder lawsuits against US accounting firms.

Since PCAOB’s inception in 2002 following the Enron and WorldCom accounting scandals, more than 50 jurisdictions have complied with the requirements to inspect and investigate audit firms of US-listed companies. But China and Hong Kong have not obeyed.

In 2020, Congress passed legislation that would subject Chinese and Hong Kong companies to delisting if the PCAOB failed to review their audits. Companies could be banned from the US by 2024 if an audit deal is not reached.

The law “was a game changer,” said Paul Leder, former chief of the SEC’s bureau of international affairs, which oversees the PCAOB. “Without the threat of delisting, the Chinese authorities would never have agreed to the unfettered access described by the PCAOB.”

Gensler said the agreement is “the first time we have received such detailed and specific commitments from China that they would allow PCAOB inspections.”

“The Chinese and [US] collectively agree that a framework is needed,” he added. “We were unwilling to allow PCAOB inspectors to travel to China and Hong Kong unless such a framework was agreed.”

Additional reporting by Cheng Leng in Hong Kong and Adam Samson in London

The Valley Voice
The Valley Voice
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.


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