The U.S. Public Company Accounting Oversight Board (PCAOB) announced that for the first time it has full access to the records of Chinese accounting firms that serve Chinese companies whose shares are traded on U.S. exchanges. Maria Belyaeva, an expert at the International BRICS Competition Law and Policy Centre, explains why this is important.
Access was secured as part of the Holding Foreign Companies Accountable Act (HFCAA) compliance checks. The law was passed in 2020 — it allows to deprive a foreign company of access to U.S. exchanges if it does not meet established audit requirements. One of the important purposes of the document was to check specifically Chinese companies: they traditionally do not disclose their financial statements, citing national security concerns. Nevertheless, in order to maintain the presence of their firms, the Chinese side made concessions: at the end of this August, the PCAOB signed an agreement with the China Securities Regulatory Commission to conduct inspections in Hong Kong.
The head of the US Securities and Exchange Commission (SEC) Gary Gensler then expressed doubts that the terms of the agreement would be fulfilled as expected. However, the inspection activities were completed even earlier than planned and the PCAOB was granted "unprecedented access": the Board managed to conduct all the necessary checks without interference or consultation with the PRC authorities.
The fact that this access was granted is not yet evidence of compliance by the Chinese companies, but the PCAOB confirms that the inspectors were not obstructed in any way by the Chinese authorities during the inspections. The findings will be made as early as next year.
The U.S. side initially took a rather tough negotiating stance.
"Access to the US capital markets is a privilege. It's not a right,"
declares PCAOB chairwoman Erica Williams.
Even with the full cooperation of the Chinese side, the PCAOB openly expresses its distrust:
"The PCAOB recognizes that the Chinese authorities may obstruct the PCAOB’s ability to inspect and investigate registered public accounting firms in mainland China and Hong Kong completely."
In this case, the Council promises to reconsider its decision immediately. Interestingly, for the past few years China has been using rather harsh rhetoric in the international arena: the near-aggressive language has been called "wolf warrior diplomacy”. In this way, the country opposes, as it claims, the arrogant and one-sided position of the United States and its imposition of its own interests on the international community.
The phrase "Chinese people won’t swallow this" has gained enormous popularity among the general public, which is how Yang Jiechi, Director of the Office of the Foreign Affairs Commission of the CPC Central Committee, responded to the American side at the negotiations in Anchorage in 2021.
We see the PCAOB putting itself in a position of strength, yet China continues to cooperate. Apparently, in this case, the economic risks were too high — we are talking about the potential delisting of more than 150 companies, including Internet giants Alibaba, JD.com and Pinduoduo.