China to give US access to audit data to stave off mass expulsion of Chinese companies from US exchanges
- The Chinese body agrees to grant access to redacted auditing data in effort to stop Chinese stocks being expelled from US exchanges, sources say
- US officials will be in Hong Kong by mid-September to commence their review after screening by Chinese authorities
China and the United States signed an accord granting the US accounting oversight board access to Chinese audit data, ending an impasse that has wiped billions of dollars off Chinese stocks with the spectre of mass expulsion from US exchanges.
“The cooperation will start soon,” the CSRC said. The agreement “has also been reached on the cooperation framework for regulatory inspection and investigation activities to be conducted by accounting firms, which will meet the rules and regulations of both sides”, it said.
Before the signing of the agreement, the CSRC had been working on a new approach to end the impasse with the PCAOB, including a plan for the access to be conducted in Hong Kong, sources told the South China Morning Post.
The CSRC, mandated by a 2019 law to work with overseas regulators on the transfer of securities-related documents, is agreeable to the audit papers of Chinese companies being inspected by foreign regulators, provided certain names and address of factories, customers and vendors are redacted before the papers are released, sources said.
Confidential data such as personal identity numbers must also be redacted, as required by China’s cybersecurity laws, the sources added.
An agreement would be “a major breakthrough in solving the deadlock between China and the US”, Edmund Wong Chun-sek, who represents the accounting functional constituency in Hong Kong’s legislature, said earlier in the day. He was not involved in the negotiations.
The two statements by the PCAOB and the CSRC did not provide details of their collaboration. Cross-border regulatory collaboration on audits will further improve the quality of audits and protect investors’ interests, and will be favourable to companies pursuing cross-border stock market listings, the Chinese regulator said.
Who’re you calling a cheat? China rebuts US fraud claim with overture
“On paper, the agreement signed today grants the PCAOB complete access to the audit work papers, audit personnel and other information we need to inspect and investigate any firm we choose, with no loopholes and no exceptions,” she said.
“But the real test will be whether the words agreed to on paper translate into complete access in practice.”
She has directed the PCAOB’s inspection team to finalise their preparation so that such inspections can start by mid-September and “put this agreement to the test”, she added.
The concessions are among China’s latest overtures to relieve tensions that have routed Chinese stocks listed in mainland China, the US and in Hong Kong this year.
But a key question remains over where to examine the audit work papers. The CSRC wants the PCAOB to conduct its work in China, keeping with the letter of the 2019 law that bars financial data from being taken abroad.
“Securing the cooperation of Chinese authorities to conduct on site inspections and investigations of mainland China firms in Hong Kong was an important part of our negotiations to ensure the health and safety of PCAOB staff amid ongoing COVID protocols in mainland China,” the officials said.
Hong Kong’s stock market has risen on a mixture of good news from China’s infrastructure spending and the possible breakthrough in the auditing impasse, with the benchmark Hang Seng Index rising 4.7 per cent in two days.
Does Trump want to fence off Wall Street from Chinese firms?
Some 168 Chinese companies were listed in the US with a combined market value at US$1.5 trillion on the New York Stock Exchange (NYSE) as of June, audited by 15 Hong Kong and mainland accounting firms registered with the PCAOB.
They faced delisting as soon as next year, with the US Securities and Exchange Commission (SEC) upping the ante since March by declaring New York-listed Chinese companies liable under the 2020 Holding Foreign Companies Accountable Act (HCFAA).
Major Chinese companies listed in the US rose in pre-market trading on Friday, with Alibaba up 6.2 per cent, Pinduoduo rising 7.4 per cent and Baidu jumping 5 per cent.
The HFCAA came into effect last December, requiring foreign companies listed in the US to comply with audit inspection rules under the auspices of the PCAOB, or face expulsion from US exchanges after three consecutive years of non-compliance.
US lawmakers responded to the truce with scepticism, urging the PCAOB to exact conformity and transparency from the Chinese side.
One HFCAA sponsor, Senator Chris Van Hollen, Democrat of Maryland, warned US auditors to “closely monitor China’s compliance to the agreement – we’ll be closely watching what they do, not what they say”.
Senator Marco Rubio, a Florida Republican, cautioned: “The PCAOB must not accept anything short of full compliance and transparency with US officials. No deviations. No exceptions.”
China’s 2019 securities law bars the overseas transfer of financial data. The same law, though, mandates the CSRC to set up mechanisms for collaborating with overseas regulators.
One of the possible solutions involved granting the PCAOB access to the audit papers of China-based companies after they are cleared by the Chinese finance ministry for state secrets or sensitive data, the Post reported in March.
Progress had been slow but steady, sources said. Debates linger over how germane personal data and identification details are to audit paper trails. Compromises may be possible if the redacted data can still show their significance to the finances of the company under audit, sources said.
The CSRC has briefed several of the largest Chinese companies listed on the NYSE since March, urging them to curate their audit working papers to prepare for vetting by the finance ministry, where global audit and data privacy principles will be applied, the sources said.
Paul Leder, a former senior SEC official now at Washington-based law firm Miller & Chevalier, said that he expects the Chinese side to “take all steps to ensure that the inspectors get all of the information they request” because the deal “must have required the approval of the Chinese State Council”.
SEC adds more than 80 Chinese firms to list liable under auditing law
The PCAOB is a product of the 2002 Sarbanes-Oxley Act, enacted to protect US market investors from fraud after Enron’s bookkeeping scandal two decades ago pushed the energy company into bankruptcy and led to the dissolution of the accounting firm Arthur Andersen.
Paul Gillis of Guanghua School of Management at Peking University described the deal as an “indication” that the US and China “wish to avoid a decoupling”.
He noted that the timeline to conclude the inspection remains tight: “The PCAOB must certify to the SEC that the deal holds by year end. And there are over 30 CPA firms to inspect – a major task.”
Additional reporting by Khushboo Razdan.
