U.S., China Reach Preliminary Audit Review Deal to Avoid Delistings

By Lulu Yilun Chen and Lydia Beyoud, Bloomberg News (TNS)

Beijing and Washington have reached a preliminary deal to allow American officials to review audit documents of Chinese businesses that trade in the US, a first step toward avoiding the delisting of about 200 firms from New York exchanges.

U.S. shares from Chinese companies surged on Friday after regulators announced the deal to allow Public Company Accounting Oversight Board inspectors to access audit work papers and personnel. American officials plan to be on the ground in Hong Kong by mid-September to start the reviews.

The agreement marks a major breakthrough in a decades-long standoff between the two superpowers over access to audit documents. The long-simmering accounting dispute became a political sticking point after a U.S. law in 2020 said firms whose work papers can’t be inspected face being kicked off American stock exchanges.

China and Hong Kong are the lone two jurisdictions worldwide that haven’t allowed the PCAOB inspections, with officials there citing national security and confidentiality concerns. The agreement announced on Friday represents a rare compromise on the issue from Beijing, which has repeatedly vowed to bolster market confidence while balancing national security concerns with the needs of businesses.

“We have this unprecedented arrangement signed this morning, but we still need to see over the next several months whether there will be compliance,” Securities and Exchange Commission Chair Gary Gensler said in an interview on “Surveillance” on Bloomberg Television. He said the deal was more comprehensive than that with any other country, and that American officials would be able to assess by December whether they were getting sufficient access.

U.S. officials stressed that the agreement was just a first step. The PCAOB will need to get a large number of its inspectors on the ground and audit checks on selected firms could take months.

Separately, the China Securities Regulatory Commission said delistings can be avoided if follow-up cooperation can satisfy both sides. In a statement, the CSRC called the agreement a major step and said it established clear rules for handling sensitive information.

After the deal was announced, shares of large-cap Chinese technology giants surged Friday in US trading, their second straight day of outsized gains. Alibaba Group Holding Ltd. rose as much as 5%, while JD.com Inc. added 4.6% and Pinduoduo Inc. Jumped more than 6%. The moves pushed the Nasdaq Golden Dragon China Index higher by as much as 4.1%, putting it on track for a fifth straight session of gains.

Talks between Beijing and Washington on the issue gathered pace after state-owned companies including China Life Insurance Co., PetroChina Co. and China Petroleum & Chemical Corp. said on Aug. 12 that they planned to delist from U.S. exchanges. Meanwhile, firms such as Alibaba are seeking primary listings in Hong Kong.

In a press briefing, the PCAOB said inspectors were preparing to deploy to Hong Kong to begin reviews. The city was chosen because of easier quarantine protocols related to COVID-19, officials said. The watchdog’s staff told reporters that the agreement allows for full and complete access to the audit work papers of companies in both mainland China and Hong Kong.

The PCAOB added that it will get access to unredacted documents under the deal. More sensitive materials would be available to American inspectors on a “view only” basis, the regulator said.

While the 2020 U.S. law set a time frame for booting companies from American markets for non-compliance, the requirement that all public companies submit to PCAOB inspections of their audits was included in the 2002 Sarbanes-Oxley Act. That legislation was passed in the wake of the Enron Corp. accounting scandal and it’s meant to prevent fraud and wrongdoing that could wipe out shareholders.

— With assistance from Divya Balji, Lisa Du, Matt Turner, Lisa Abramowicz, Tom Keene, and Jonathan Ferro

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