China, US Reach Audit Deal in Push to Avoid Delistings

China, US Reach Audit Deal in Push to Avoid Delistings
Photo: 30.08.2022 124

Chinese and US authorities have come to a landmark audit oversight cooperation agreement, reported Yicai Global. This is a major step towards resolving auditing tensions that threaten to force many Chinese companies off US bourses.

Both China and the US can inspect audit firms within the jurisdiction of both sides in accordance with the laws and mandates of their respective authorities, according to the agreement penned by the China Securities Regulatory Commission, China’s Ministry of Finance and the US Public Company Accounting Oversight Board on Aug. 26. 

“The signing of the audit supervision cooperation agreement marks a key step forward by regulators in China and the US towards resolving the audit oversight issue by strengthening cooperation, which is in line with the hopes and expectations of the market,” 

a high-ranking official at the CSRC said.

The Holding Foreign Companies Accountable Act passed by the Trump administration in 2020 requires all foreign firms listed on US stock exchanges to, among other things, meet the Public Company Accounting Oversight Board’s accounting requirements. Should any company fail to do so for three consecutive years it will be prohibited from trading on any US bourse or over-the-counter exchange.

Since then, over 100 Chinese companies, including e-commerce giants Alibaba Group Holding and as well as internet giant Baidu, have been placed on a US delisting watchlist. But the sharing of accounts overseas contravenes China’s own data security regulations.

“The CSRC and other departments have recently improved confidentiality regulations for offshore listings, and put forward clear requirements for standardizing the information security management of audit papers,”

the source of Yicai Global said.

Should this audit cooperation be successful, it will help prevent the US delistings of many Chinese firms and make the US a more popular overseas listing destination for Chinese businesses, he added. More than 200 Chinese companies are listed on US bourses, and just over 30 Chinese accounting firms are registered with the Accounting Oversight Board.

The BRICS Competition Centre expert Maria Belyaeva notes interesting differences of opinion about the upcoming process:

"According to Erica Williams, the Chair of the PCAOB, the agreement gives the PCAOB discretion to select any companies, auditors, and potential violations for inspection and investigation — without consulting or interfering with the Chinese authorities. However, the Chinese reports emphasize the opposite: the parties will agree in advance on an inspection plan, and the U.S. will obtain the necessary documentation through the Chinese regulator. The Chinese interpretation is that the U.S. side does not have the right to enter China independently and independently to inspect Chinese audit companies and gather the necessary materials."

The China Securities Regulatory Committee also stresses that the agreement will be enforced subject to the domestic laws of both countries. 

"It will be interesting to see how China can reconcile the disclosure of such sensitive information with increased regulation of data exports and security," 

says Maria Belyaeva.


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