US, China close to deal resolving impasse over audit inspections

Washington and Beijing are close to a deal that would give U.S. regulators access to audits of Chinese companies listed on U.S. stock exchanges, a potential breakthrough in talks that have languished for more than a decade.

Hong Kong bankers were notified of a possible deal this week, according to people familiar with the matter. American certificates of deposit linked to shares of Chinese companies including Baidu, JD.com and Pinduoduo started trading higher on Tuesday, suggesting a resolution was in the works.

The United States has required Chinese companies and auditors to make their financial audits available for inspection every three years by the Public Company Accounting and Oversight Board, an auditor oversight body, or risk being banned from listing on Wall. Street.

But Beijing does not allow foreign regulators to inspect the audits of Chinese companies, citing a desire to protect state secrets. This month, five Chinese state-owned enterprises said they would voluntarily remove from US stock exchanges before being ousted in 2024 as a result of the ongoing ban.

The prospect of avoiding mass Wall Street delistings boosted U.S.-listed Chinese stocks, with the Nasdaq Golden Dragons index of major Chinese tech groups traded in New York jumping more than 6% on Thursday.

Additional information about the potential deal and the timing of an announcement was not available, but the PCAOB said any deal would include full U.S. access to Chinese listeners.

The PCAOB declined to comment Thursday.

The news was first reported by the Wall Street Journal and attracted some accounting unprepared professionals. But there had been signs this year that countries were struggling to find a solution.

In May, a senior Securities and Exchange Commission official said in a speech that Chinese companies may seek to save state secrets leaving the US markets. This was followed by voluntary delisting announcements this month by companies such as PetroChina and China Life Insurance Company.

Taken together, these actions suggest the The United States offered a way for Chinese officials to cooperate in removing certain companies with state secrets from the PCAOB’s jurisdiction, said Paul Leder, former head of the SEC’s International Affairs Office, which oversees the PCAOB.

“The fact that five companies linked to the Chinese government have taken this step [to delist] signals that progress is being made on an agreement that would allow the PCAOB access to audit working papers located in China and Hong Kong,” said Leder, now an attorney at Miller & Chevalier. “[This] certainly suggests that a deal with the PCAOB is in the works.

Any deal would be a first step to gaining access to Chinese audit documents, PCAOB Chair Erica Williams said.

“Our team needs to be able to go to China and test whether what’s written on paper works in practice,” Williams said in a July speech.

A deal would hinge on cooperation between U.S. and Chinese officials, said Lynn Turner, a former SEC chief accountant.

“Until we see the terms of the deal, it would be difficult to assess whether it will prove successful or not,” he said.

Additional reporting by Hudson Lockett in Hong Kong

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