China’s securities regulator signals willingness to work with US over audit inspections
- The China Securities Regulatory Commission says it hopes to ‘create conditions’ to cooperate over an issue that threatens to delist US$1.3 trillion in shares
- Beijing has refused to allow US regulators to go through its companies’ books, saying they contain state secrets
China’s securities regulator has said it will “create conditions” to cooperate with the United States over how it supervises the auditing of Chinese companies.
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 Public Company Accounting Oversight Board (PCAOB) or face being delisted within three years.
Less known however, is that the preceding paragraph of Section 117 of the securities law mandates the CSRC to set up mechanisms for cross-border collaboration with overseas regulators, such as the US SEC and the PCAOB.
WTO chief warns EU, Japan, US not to ‘target’ China using trade reform
The agency helped PCAOB review the quality control system of a mainland Chinese auditing firm in 2016 and 2017, as well as work papers of three companies whose shares are listed in the US, according to the statement. However, the most recent proposal on collaboration “has not received any positive response from the PCAOB,” it said.
The PCAOB is a product of the Sarbanes-Oxley Act of 2002, enacted to protect stock market investors from financial fraud after Enron’s bookkeeping scandal more than a decade ago pushed the energy company into bankruptcy and led to the dissolution of the accounting firm Arthur Andersen.
A separate bill – the Accelerating Holding Foreign Companies Accountable Act – passed the Senate and is awaiting a House of Representatives vote. It would shorten the timescale to two years.
Many US-listed Chinese companies and US investors have been concerned that the impasse could deteriorate to a point where the countries’ financial systems become decoupled.
“The US stance on the issue hardened during the Trump administration,” said Brendan Ahern, chief investment officer at KraneShares, which deals in Chinese exchange-traded funds.
Until this spring, Belgium had been the only other country not agreeing to joint audit inspections with the US, but when it changed its policy in April, that “left China alone”, Ahern said.
Chinese officials have been resisting the requirements, saying the US is politicising securities regulation.
Beijing’s securities regulators said late last year that joint inspections may be the way to move things forward, and earlier this month China sent the US authorities a proposal about co-auditing Chinese-listed firms.
The pressure increased when the US Securities and Exchange Commission (SEC) announced last month that it planned to require additional information from Chinese companies seeking to go public on American exchanges.
American investors have borne the brunt of Chinese companies’ lack of disclosure over the years.
