China-U.S. audit deal could prevent massive stock delisting

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

U.S. regulators have long required access to audit documents of Chinese companies registered in the United States, but Beijing does not want to allow foreign regulators to inspect accounting firms, citing security concerns.

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

By Friday, 163 companies, incl. Alibaba (WOMAN), JD.com (JD)as well as Nio (NIO) has been identified by the US regulator as being at risk of being banned from trading due to non-compliance with audit requirements.

The PCAOB said in a statement that the agreement would allow it “to choose, at its sole discretion, the firms, audit engagements and potential violations it reviews and investigates – without consulting or involving Chinese authorities.”

The US regulator added that its inspectors will be able to “view the full working papers of the audit with all information included, and the PCAOB will save the information as needed.”

“The PCAOB has direct access to interviews and testimony from all employees involved in audits that the PCAOB reviews or investigates,” it said in a statement.

The China Securities Regulatory Commission (CSRC) said the agreement is an important step towards solving the audit problem.

He added that listing Chinese companies in the US has benefited investors, companies and both countries.

The signing of the protocol between China and the United States shows that the two sides “have taken an important step to address the issue of regulating the auditing of US-registered Chinese companies by expanding cooperation,” the CSRC said in a statement.

“This is in line with the hopes and expectations of the markets … if the subsequent collaboration satisfies the regulatory needs of each party, it is hoped that the audit problem will be resolved and passive delisting can be avoided.”

Current U.S. rules stipulate that Chinese companies that fail to comply with audit working papers will be suspended from trading in the U.S. in early 2024, but that deadline could be extended.

Securities and Exchange Commission (SEC) Chairman Gary Gensler said Chinese companies are still facing delisting if US authorities cannot access their accounts.

“However, make no mistake: the proof will be in the pudding,” he said.

“This agreement will only make sense if the PCAOB can actually fully screen and investigate accounting firms in China.”

Major Chinese companies listed in the US surged in premarket trading, with Alibaba up 2.6%, Pinduoduo nearly 6% and Baidu up 3.3%.

“This is seen as a positive first step. However, things are still not completely set in stone, as evidenced by the various sudden reversals in the past,” said Samuel Sue, Market Specialist at CGS-CIMB.

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