BEIJING AND WASHINGTON have reached a preliminary deal to allow US inspectors to review audit documents of Chinese businesses that trade on US exchanges, a first step toward avoiding the delisting of about 200 Chinese firms from New York exchanges.
This is the latest attempt to resolve a more-than-a-decade-long standoff over mutually incompatible auditing regulations. As the two headlines from the official announcements (above) indicate, it is progress towards a resolution, not the resolution itself.
So that regulators can ‘audit the auditors’ of companies listed on US exchanges, US securities rules require Chinese firms listed in the United States to allow access to documents that Chinese restrictions prevent them from disclosing.
China and Hong Kong are the sole foreign jurisdictions that have not allowed inspections by the Public Company Accounting Oversight Board (PCAOB), the US agency that audits the auditors. All companies listed in the United States must submit to PCAOB inspections under the Sarbanes-Oxley Act of 2002. Beijing cited national security and confidentiality concerns as its grounds for refusing.
Since the US Congress passed the Holding Foreign Companies Accountable (HFCA) Act in 2020, putting a three-year time limit on uncompliant companies coming into compliance, some 200 Chinese firms with a market value of more than USD1tn have been potentially at risk of mandatory delisting if they do not do so.
Under the new agreement, the PCAOB will start inspections in Hong Kong in mid-September. Its inspectors are not travelling to the mainland for health safety reasons, but the agreement stipulates that all the documents they request will be made available to them in Hong Kong.
Towards the end of the year, the PCAOB will determine if they have had the access they require to affirm whether Chinese firms listed in the United States are in compliance with US rules. If not, the US Securities and Exchange Commission (SEC) will determine if the delistings process will go ahead under the HFCA.
The deadline is tight. PCAOB inspections can take months, and the agency will need an army of inspectors to conduct a sufficient sample of audits in parallel.
This is the most detailed and prescriptive agreement on this issue that the two sides have reached, but it is not the first. China’s record of making commitments in principle but then stalling on honouring them in practice advises caution. The success of this deal will be determined by its implementation. There is many a slip between cup and lip, as the old saw has it.
The public announcements of the agreement on both sides underscore the need for caution, with the China Securities Regulatory Commission calling it a ‘cooperation framework’ and the PCAOB, ‘a first step’.
The recently announced intent of several prominent Chinese firms to delist voluntarily from the New York exchanges also suggests that Beijing may be comfortable with a managed withdrawal from US capital markets in favour of primary listings in Hong Kong.