China-US audit deal could avert mass stock delistings

The Public Company Accounting Oversight Board (PCAOB) said it was the most detailed and prescriptive agreement the regulator has ever reached with China.

US regulators have for long been demanding access to audit papers of Chinese companies listed in the United States, but Beijing has been reluctant to let overseas regulators inspect accounting firms, citing security concerns.

The decision marks a major thaw in US-China business relations and will be a huge relief for hundreds of Chinese companies and investors who have invested billions of dollars in the firms that have a chance to retain access to the world’s deepest capital markets.

By Friday, 163 companies, including Ali Baba (BABA), JD.com (J.D.)and Nio (NIO) had been identified by the US regulator as facing trading prohibition risks for not complying with audit requirements.

In a statement, the PCAOB said the agreement would allow it “sole discretion to select the firms, audit engagements and potential violations it inspects and investigates — without consultation with, nor input from, Chinese authorities.”

The US regulator added its inspectors would be able to “view complete audit work papers with all information included and for the PCAOB to retain information as needed.”

“The PCAOB has direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates,” it said.

China’s Securities Regulatory Commission (CSRC) said the agreement was an important step towards addressing the auditing issue.

It added keeping Chinese companies listed in the United States benefited investors, companies and both countries.

The signing of the protocol between China and the United States signals that both sides have “made a crucial step to solve the audit regulatory issue of US-listed Chinese companies through enhanced cooperation,” according to the CSRC statement.

“It is in line with the hope and expectation of the markets … if cooperation afterwards satisfies each side’s regulatory needs, there is hope that the audit issue will be resolved, and passive delisting will be avoided.”

Current US rules stipulate that Chinese companies that are not in compliance with audit working papers requests will be suspended from US trading in early 2024, but that deadline could get brought forward.

Securities and Exchange Commission (SEC) chairman Gary Gensler said Chinese companies still faced delisting if their accounts could not be accessed by US authorities.

“Make no mistake, though: The proof will be in the pudding,” he said.

“This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China.”

Major Chinese companies listed in the United States rose in premarket trading, with Alibaba up 2.6%, Pinduoduo gaining nearly 6% and Baidu up 3.3%.

“This is seen as a positive first step. However, things are not fully cast in stone yet, as seen from the various sudden reversals in the past,” said Samuel Siew, market specialist at CGS-CIMB.

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