China’s new audit rules don’t answer all of US-listed firms’ prayers, industry watchers say
- The onus will be on listed companies to assess what is sensitive information, Chamber of Hong Kong Listed Companies CEO says
- Inevitable that some companies with sensitive information may be more uncertain about listing in the US: CPA Australia councillor
Not only did regulators in the US need to agree with the new requirements, but such companies and their auditors will also need clearer guidelines on how to comply with the new rules.
“The onus will be on listed companies to assess what is sensitive information. However, it is a fine line between withholding sensitive information and an incomplete disclosure,” said Mike Wong, CEO of the Chamber of Hong Kong Listed Companies.
The China Securities Regulatory Commission (CSRC) on Saturday issued drafted rules that scrap a requirement that only Chinese regulators can conduct on-site audits of Chinese companies listed overseas. China currently denies access to the US’s Public Company Accounting Oversight Board (PCAOB), citing state secret concerns among others. The new rules also require listed companies and their accountants to decide what is sensitive information and what cannot be handed over to US regulators.
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Listed companies will be under great pressure from both US regulators and shareholders to make sufficient disclosures, while they will also need to follow China’s security requirements, Wong said. To avoid such trouble, companies will avoid listing in the US, he added.
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The solution may well be half-baked as some Chinese companies in possession of sensitive information might not be able to fulfil the audit requirements of both countries, said Clement Chan, managing director of accounting firm BDO. But it was a step in the right direction, he added.
Accounting professionals will rely on clear guidelines by Chinese regulators on the audit working papers that may be subjected to inspections by US regulators, said Robert Lui, councillor of CPA Australia’s Greater China Division.
“Industries such as retail, construction or manufacturing should have less sensitive information, while the telecoms industry may own more sensitive information, which may have an impact on the relevant audit documentation,” Lui said. “It is inevitable that some of these companies that have sensitive information may be more uncertain about listing in the US.”
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Lui, however, said the CSRC’s announcement was a very positive breakthrough. “It shows China is committed to negotiations, and to finding a solution that can benefit both countries, and to protecting the interests of investors,” he said.
“Following this development, we believe the likelihood of delistings has decreased, potentially removing a significant overhang for Chinese companies,” said Mike Shiao, chief investment officer for Asia excluding Japan at US investment firm Invesco. “This positive development could trigger a short-term rebound in the stock prices of ADRs [American depository receipts],” he said in a statement.
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Stephen Law, a veteran private equity investor who has helped many companies list in the US over the past two decades, said the whole issue was not a listing issue, but one involving a “political consideration”.
“I started listing companies in the US 20 years ago with similar audit arrangements without any problems,” he said. “At present, it is a compromise from the mainland’s side. I suppose the US has to consider this out of its overall fight with China. This is a political consideration.”