China, US regulators start talks on audit inspection of Chinese companies on American exchanges amid moves to delist these firms

The China Securities Regulatory Commission said its talks with US authorities over audit inspection requirements ‘have made some progress’
US regulator the Public Company Accounting Oversight Board said it was “unable to inspect or investigate completely” 15 Hong Kong and mainland accounting firms

US-listed Chinese stocks

Enoch Yiu

Published: 5:54pm, 18 Dec 2021

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China’s securities regulator and American authorities have initiated talks on the audit inspection of US-listed Chinese companies, which could stave off the potential delisting of these firms after years of non-compliance.

“The relevant regulators of China and the US have started the negotiations over the regulatory cooperation issues [and] have made some progress,” according to a statement from the China Securities Regulatory Commission (CSRC) on Friday.

The CSRC released the statement soon after US regulator the Public Company Accounting Oversight Board (PCAOB) published early on Friday a report, which determined that it was “unable to inspect or investigate completely” registered public accounting firms headquartered in mainland China and Hong Kong because of the position taken by authorities in those markets.

Seven mainland Chinese and eight Hong Kong accounting firms are currently overdue for inspection, according to the PCAOB. The report indicated that the PCAOB has never completed an inspection of a mainland Chinese firm and has not finished an inspection of a Hong Kong firm since 2010.

The facade of the China Securities Regulatory Commission headquarters in Beijing. Photo: Simon Song

The 15 accounting firms mentioned in the US regulator’s report are responsible for auditing 191 US-listed Chinese firms with a combined market capitalisation at US$1.9 trillion.

The CSRC, however, said on Friday that the US report did not fully reflect China’s efforts to reach a solution. It indicated that both the US Securities and Exchange Commission and PCAOB have been working with Chinese authorities to draw up a solution

“We are ready to have further discussions with US authorities any time,” the CSRC said. “As long as both sides adopt an approach of mutual respect and trust that follows international practice, the two sides can find a path that could meet the regulatory requirements of both parties to protect the interests of the global investors and the development of the capital markets of the two countries.”

Last year, the CSRC presented proposals to collaborate with the PCAOB since 2019. These were geared towards reconciling local auditing rules with global bookkeeping standards, rebutting criticisms that Beijing was allowing Chinese companies to “cheat” on US capital markets.

The CSRC’s latest statement comes months after it pledged to cooperate with the US over how it supervises the auditing of Chinese companies, which could prevent these firms from being delisted from American bourses in three years if they do not share their audits for review.

US moves a step closer to delisting Chinese firms on American stock exchanges

The decades-long sparring between the two countries’ regulators culminated in 2019 with the US Holding Foreign Companies Accountable Act, which requires that foreign companies listed in the US comply with audit inspection rules under the auspices of the PCAOB or face being delisted within three years.

China has long denied US securities regulators the ability to inspect the financial audits of its US-listed companies, saying they contain state secrets. Chinese law bars financial institutions, including accounting, audit and legal firms, from providing any securities-related documents to foreign parties without permission.

Despite the creation of a pilot scheme for cross-border cooperation in 2016, the PCAOB has not completed any investigation about audit work done on US-listed Chinese companies because Beijing refuses to allow the US regulator to conduct such routine inspection.

As such, the PCAOB report said Hong Kong and mainland China cannot comply with audit inspection requirements under the Holding Foreign Companies Accountable Act. A company that fails to comply with this US law for over three consecutive years is subject to delisting.

People are seen on Wall Street outside the New York Stock Exchange building in New York City. Photo: Reuters

While the PCAOB is expected to publish another report about this matter next year, it is still keen to negotiate with mainland Chinese regulators.

“We remain interested in a relationship with [Chinese] authorities that facilitates the access necessary to oversee PCAOB-registered audit firms in mainland China and Hong Kong, consistent with the robust international regulatory cooperation we experience everywhere else in the world,” said Duane DesParte, acting chairman of PCAOB, in a statement on Thursday.

“To protect investors and to carry out the PCAOB’s mandate, our inspectors and investigators need consistent access across all jurisdictions to the audit work performed for public companies in US capital markets.”

“The PCAOB report marks a step on the journey to delist the Chinese issuers should the present situation remain unresolved,” said Clement Chan, chairman of Hong Kong Association of Registered Public Interested Entity Auditors.

“However, it is not a dead-end yet,” said Chan, who is managing director of BDO, one of the Hong Kong-based accounting firms identified in the US report. “The CSRC and PCAOB should continue their efforts to reach a middle ground and overcome this hurdle, as both have the same goal of maintaining a robust and healthy capital equity market.”

China’s regulator soothes delisting fears amid worldwide sell-off

Local brokers also urge the two sides to reach an agreement as soon as possible.

“It is vital for Hong Kong, as an international financial centre, to give confidence to investors,” said Tom Chan Pak-lam, chairman of the Hong Kong Institute Securities Dealers, an industry body of local brokerage houses. “There are a lot of US-listed Chinese companies that have dual primary listing or secondary listing in Hong Kong. If they were labelled as non-compliant with the US regulation, it will affect investors’ confidence in these companies.”

Representatives of other accounting firms, the Hong Kong government and local regulator the Financial Reporting Council did not comment. Earlier this month, Christopher Hui Ching-yu, the city’s Secretary for Financial Services and the Treasury denied claims that Hong Kong was not cooperating with US authorities.