US and China Reach Landmark Audit Inspection Agreement

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 end the threat of delisting of around 200 stocks trading on Wall Street.

The announcement from US and Chinese regulators is a breakthrough in a longstanding impasse. Beijing has not allowed foreign regulators to inspect audits of Chinese companies, citing a desire to protect state secrets. The United States said it will force Chinese companies listed in New York are worth more than $1 billion if they fail to comply with US audit rules.

The Public Company Accounting Oversight Board, America’s auditor watchdog, said friday it would have the power to select which companies, audit assignments and potential violations it inspects and investigates, without consulting Chinese authorities.

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

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

“Make no mistake about it, though: the proof will be in the pudding,” Gary Gensler, chairman of the U.S. Securities and Exchange Commission, said in a statement. “This deal will only make sense if the PCAOB can actually fully inspect and investigate auditing firms in China.

“If not, approximately 200 China-based issuers will face prohibitions on trading their securities in the United States if they continue to use these audit firms,” he added. .

The The CSRC said the agreement “establishes a framework for cooperation in accordance with the respective laws of the authorities” and “is an important step for Chinese and American regulators towards resolving the issue of audit oversight which concerns mutual interests”.

The deal will mean that the working papers of the big four audit firms prepared in mainland China will be inspected by PCAOB officials in Hong Kong, according to people with knowledge of the details. Several people familiar with the matter warned that the pilot would have to go smoothly for the PCAOB to agree to China complying with US audit disclosure rules.

One of the people familiar with the matter – a senior banker close to a number of Sino-US certificates of deposit (ADR) – said an agreement to carry out a test case had been reached before the president of House Nancy Pelosi does travel to Taiwan, but the announcement was delayed. due to heightened nationalist sentiment in China around 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 familiar with the matter, a portfolio manager at a global asset manager.

JPMorgan Chase held a call with clients in Asia and Hong Kong on Tuesday to discuss the status of audit negotiations, according to a person who attended the call. A person on the call said that Liu He, the Chinese vice premier, had drafted a consultation document that would allow the PCAOB full access to Chinese audit records, and that it was shared to US and Chinese regulators.

A senior financier in Hong Kong close to a number of Chinese tech groups said the solution had been “delayed by auditor liability issues” in recent weeks, prompted by concerns about an increase in lawsuits. shareholders against accounting firms in the United States.

Since the PCAOB was created in 2002 following the accounting scandals at Enron and WorldCom, more than 50 jurisdictions have complied with its requirements to inspect and investigate the audit firms of publicly traded companies in the United States. But China and Hong Kong have not complied.

In 2020, Congress passed legislation this would subject Chinese and Hong Kong companies to debarment if the PCAOB could not review their audits. Companies could be banned from the United States by 2024 if an audit agreement is not reached.

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

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

“The Chinese and [US] agreed on the need for a framework,” he added. “We were not prepared for PCAOB inspectors to go to China and Hong Kong unless there was agreement on such a framework.”

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

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