Exclusive | US regulators to meet Deloitte, EY in Hong Kong next week to prepare for summer inspections of audits of US-listed Chinese firms

Executives of the Public Company Accounting Oversight Board will hold ‘preparatory meetings’ with the accounting giants ahead of inspections later in the year, sources say
They will be trying to understand their internal controls and operations before assessing their auditing of Chinese companies listed in the US

Accounting and auditing

Enoch Yiu

Published: 6:30pm, 17 Mar 2023

Why you can trust SCMP

American accounting regulators will come to Hong Kong next week to hold “preparatory meetings” with Deloitte and EY ahead of inspections later in the year as they seek to assess their auditing of Chinese companies listed in the US, according to people familiar with the matter.

Executives of the Public Company Accounting Oversight Board (PCAOB) will meet senior management of the two accounting firms in an attempt to understand their internal controls and operations, three sources who did not wish to be identified told the Post.

The PCAOB will inform Deloitte and EY at a later stage which companies or new listings it wants to inspect, said one of the sources. The inspections will be conducted in the summer or September.

“Hong Kong has been chosen by the PCAOB to do the inspection as their experience of the inspections last year was very good. China’s regulator also feels comfortable letting the audit working papers of mainland firms be passed on to Hong Kong for the PCAOB to do the inspection,” another source said.

Deloitte and EY declined to comment when contacted by the Post, while the PCAOB did not respond to inquiries.

The US watchdog said in December that it had been allowed to inspect the audit firms servicing mainland Chinese companies listed in the United States, removing the risk of delisting hanging over many of them at the time. It was the first time in China’s history that it had allowed audit records to be taken outside the mainland for inspection.

The inspection was carried out under an agreement signed between China’s Ministry of Finance, the China Securities Regulatory Commission (CSRC), and the PCAOB in late August.

Over 30 inspectors from the PCAOB spent about nine weeks at the Hong Kong offices of PwC and KPMG going through hundreds of audit working papers. They also interviewed the firms’ accountants regarding their audits of US-listed mainland companies.

It is expected the PCAOB will conduct such inspections on an annual basis, the three sources said.

“I want to be clear: this is the beginning of our work to inspect and investigate firms in China, not the end. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward,” PCAOB chair Erica Williams said in a statement in December.

Beijing has previously denied US regulators access to the financial audits of Chinese firms listed in the US, saying these working papers contained state secrets.

A breakthrough was made in April last year, when the CSRC scrapped a requirement that only Chinese regulators could conduct on-site audits of Chinese companies listed overseas and allowed auditors to take audit records outside the mainland for inspection in a historic first.

The successful inspection of the audit records is vital for 168 US-listed mainland Chinese companies, as they can now be viewed as complying with the requirements of the US’s Holding Foreign Companies Accountable Act (HFCAA).

The act, which came into effect in late 2021, opens the possibility of their delisting if the PCAOB finds they are not compliant for three consecutive years.

The 168 firms, whose combined market value stood at US$1.5 trillion as of June 2022, were audited by 15 Hong Kong and mainland Chinese accounting firms registered with the PCAOB, according to the US regulator.