US and China Establish Historic Audit Agreement that Benefits Chinese IT firms 2022

China and the US have taken a major step toward ending a dispute that threatened to drive Chinese companies out.

Beijing / Washington: Beijing and Washington took a big step on Friday to end a dispute that threatened to drive Chinese companies, including Alibaba, from United States stock exchanges, by signing an agreement to allow United States regulators to vet accounting firms in China and Hong Kong.

United States regulators have required access to audit documents from United States-listed Chinese companies for more than a decade, but Beijing has been reluctant to allow foreign regulators to inspect accounting firms, citing national security concerns.

The deal represents a partial thaw in United States-China relations amid tensions over Taiwan and will come as a relief to hundreds of Chinese companies, investors, and US stocks, giving China a chance to retain access to the world’s deepest capital markets if it succeeds in practice.

Otherwise, about 200 Chinese companies could be banned from United States exchanges, said Gary Gensler, chairman of the US Securities and Exchange Commission. The agency previously identified Alibaba Group, JD.Com Inc, and NIO INC among those at risk.

In announcing the deal, US officials took a cautious note, warning that it was only a first step and that their view of China’s compliance would be determined by whether they could conduct inspections unimpeded, as the deal promised.

“However, make no mistake: The proof will be in the candy,” Gensler said. “This settlement will only be meaningful if PCAOB is truly able to fully inspect and investigate audit firms in China.”

However, the Public Company Accounting Oversight Board (PCAOB), which oversees audits of US-listed companies, said this was the most detailed agreement the regulator has reached with China.

The China Securities Regulatory Commission (CSRC) said the deal was an important step in addressing the audit issue and benefited investors, companies, and both countries.

In principle, the deal appears to give PCAOB what it has long demanded, namely full access to China’s audit working papers without oversight, the right to take testimony from the staff of an audit firm in China, and discretion. exclusively to choose the firms it examines.

US officials said they notified the companies selected on Friday morning and are expected to land in Hong Kong, where the inspections will take place, in mid-September.

Organizational Needs

The long-running row came to a head in 2020 when the US passed the Foreign Corporate Liability Act, forcing the Securities and Exchange Commission to deal more aggressively with US-listed Chinese companies. The clock is ticking on possible exclusions of Chinese companies.

“We have to hold China to the same standards as any other company and every other country listed on United States stock exchanges,” United States Republican Senator John F. Kennedy, a key architect of the 2020 law, said in a statement Friday.

US rules state that if China is found to be in non-compliance, its companies can be delisted from United States stock exchanges as early as 2024, but that deadline can be brought forward. Gensler said Chinese companies still face delisting if inspections are hampered.

Officials said the Supreme Council for Oversight and Accountability and the council expect to make a decision on China’s compliance by the end of the year.

“This is seen as a positive first step. However, things are not fully decided yet,” said Samuel Seo, a market specialist at CGS-CIMB.

Major Chinese companies listed in the United States are up in pre-market trading, with Alibaba shares up 2.6%, Pinduoduo shares up nearly 6%, and Baidu shares up 3.3%, before being subjected to a Wall Street sell-off on concerns about a lift in Federal Reserve interest rates.

The SEC said China-based United States issuers had a combined market capitalization of between $1 trillion and $2 trillion.

“This transaction is an important development for the global economy and the United States capital markets, which continue to stand out in large part because of its ability to balance investor protection with access to the world’s leading companies,” said Lynn Martin, president of the New York Stock Exchange. Exchange in a statement.

Nasdaq, the other major United States stock exchange, declined to comment.

Challenges Ahead

PCAOB officials said inspections will take place in Hong Kong due to strict COVID-related restrictions in China, with the option to move to the mainland in the future.

Reuters reported earlier that Beijing has asked some Chinese companies listed in the United States and their auditors to prepare for the transfer of audit documents and employees to Hong Kong.

Kai Zhan, a senior adviser to Chinese law firm Yuanda, said the deal shows that “both sides have a strong will to resolve” the dispute, although challenges remain.

“Cooperation has not completely collapsed despite the Sino-United States rivalry,” said Chan, who specializes in areas including capital markets and United States sanctions compliance.

“In an implementation, the two sides can easily clash over some technical details, so there is still uncertainty.”

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