China, and US near deal on the audit of US-listed Chinese companies: WSJ

August 25, 2022 0 Comments

The yearlong standoff between China and the US over audits may ease. Citing people familiar with the matter, Wall Street Journal reported that the two sides are close to reaching an agreement that would permit American accounting officials to visit Hong Kong and review the audit records of Chinese companies listed in New York.

Securities regulators in Beijing are making arrangements for US-listed Chinese companies and their accounting firms to transfer their audit working papers and other data from mainland China to Hong Kong, said the report.

Regulators from the US Public Company Accounting Oversight Board (PCAOB) would then travel to the semiautonomous city to perform on-site inspections of the Chinese companies’ auditors and their records.

The China Securities Regulatory Commission recently informed some accounting firms and companies about the plan, the people said, adding that U.S. accounting inspectors could arrive in Hong Kong as soon as next month. A final agreement can only be reached if the U.S. side determines that it has full access to the audit working papers, WSJ said.

If an agreement is reached, it will greatly boost the market’s confidence in investing in US-listed stocks. Under the Holding Foreign Companies Accountable Act (HFCAA), companies will be delisted if their auditors fail to be inspected by PCAOB for three consecutive years.

PCAOB have been demanding complete access to audit working papers of New York-listed Chinese companies, but Chinese regulators have refused to do so, citing data security concerns. Negotiations between officials on both sides have been ongoing for months, but progress has been slow.

Therefore, SEC has added around 160 Chinese companies to its delisting watchlist, including Alibaba, JD.com, Pinduoduo, Bilibili, NIO and more. If these firms failed to meet the audit requirements, they could be kicked off US exchanges as soon as 2024.

To reduce potential delisting risks and expand access to mainland Chinese investors, Alibaba has applied for a primary listing in Hong Kong, which is expected to be completed by the end of 2022. 

According to WSJ, Chinese regulators have told some companies in recent weeks that the government will support them being listed in the U.S., as long as the companies comply with domestic regulations on data security and personal information protection, according to people familiar with the matter.

The regulators have also indicated that they will allow U.S. accounting regulators to have unrestricted access to companies’ audit records in Hong Kong, they added.

Cover image by Aditya Vyas on Unsplash

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