The China Securities Regulatory Commission (CSRC), the Ministry of Finance and the U.S. Public Company Accounting Oversight Board (PCAOB) signed an audit oversight cooperation agreement to resolve the auditing dispute surrounding U.S.-listed Chinese companies and prevent their forced delisting from U.S. stock exchanges. The U.S. signed similar accords with France and Belgium in 2021. The agreement establishes a cooperation framework in line with the authorities’ respective laws and regulatory mandates and sets out specific arrangements for conducting inspections and investigations by both sides. According to the agreement, Chinese and U.S. regulators will both assist with the inspections and investigations of relevant audit firms conducted by the other side. Audit work papers that the U.S. regulator needs access to will be obtained by and transferred through the Chinese side, providing a feasible path for protecting information security while strengthening cooperation on audit supervision, officials said. Accounting firms will be required to meet the rules and regulations of both sides.
The U.S. stock market has responded positively. E-retailer Pinduoduo rose 7% in pre-market trading hours on August 26, while new energy vehicle (NEV) maker Nio was up 4% and financial services provider Futu Holdings rose 6%. By establishing a long-awaited comprehensive audit oversight solution acceptable to the two sides, the agreement marks a significant breakthrough in resolving the audit dispute regarding U.S.-listed Chinese companies that has exposed many of them to delisting risks. Peng Wensheng, Chief Economist at China International Capital Corp (CICC), said the agreement is not only good news for investors and public companies, but is also a win-win scenario for the two countries. For U..S.-listed Chinese companies, the agreement will reduce the possibility of forced delistings and help them to get more financing from the capital market, Peng said. For other Chinese companies with the intention of listing overseas, the option of going public on U.S. bourses is now more attractive, Peng said.
The CSRC agreed to the audit papers of Chinese companies being inspected by foreign regulators, provided certain names and addresses of factories, customers and vendors are redacted before the papers are released. Confidential data such as personal identity numbers must also be deleted, as required by China’s cybersecurity laws. The two statements by the PCAOB and the CSRC did not provide details of their collaboration. The agreement is a first step towards opening access for the PCAOB to inspect and investigate public accounting firms registered in mainland China and Hong Kong, Chairperson Erica Williams said, adding that “the real test will be whether the words agreed to on paper translate into complete access in practice.” Inspections could start by mid-September. A key question remains over where to examine the audit papers. The CSRC wants the PCAOB to conduct its work in China, in keeping with the letter of the 2019 law that bars financial data from being taken abroad.
However, China’s anti-Covid-19 rules for inbound travelers require seven days’ quarantine in a government facility, followed by three days at home or in a hotel, a tall order for PCAOB officials who are already used to open travel in the U.S., sources said. Hong Kong is offered as the alternative, since the Special Administrative Region (SAR) is a part of China, and any transfer of data to the city would not breach Chinese law, they said. The city’s recently amended “3+4” quarantine rule was also less daunting for inbound travelers, they said. Hong Kong’s Financial Reporting Council, which regulates auditors in Hong Kong, has been exploring ways for cross-border inspection of China’s audit papers, Chairman Kevin Wong said in June.
Some 168 Chinese companies were listed in the U..S. with a combined market value at USD1.5 trillion on the New York Stock Exchange (NYSE) as of June, audited by 15 Hong Kong and mainland accounting firms registered with the PCAOB. They faced delisting as soon as next year, with the SEC upping the ante since March by declaring New York-listed Chinese companies liable under the 2020 Holding Foreign Companies Accountable Act (HCFAA). Over 163 U.S.-listed Chinese companies have been added to the list since March. Chinese listed companies would face expulsion from U.S. exchanges after three consecutive years of non-compliance. Paul Leder, a former senior SEC official now at Washington-based law firm Miller & Chevalier, said that he expects the Chinese side to “take all steps to ensure that the inspectors get all of the information they request” because the deal “must have required the approval of the Chinese State Council”.
This overview is based on reports by the South China Morning Post and the China Daily.
