The US and China say they’ve reached agreement on audits of Chinese companies

Hundreds of Chinese companies listed on US exchanges faced the possibility of being delisted.
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Max Zolotukhin/Getty Images

· 3 min read

The Public Company Accounting Oversight Board (PCAOB) has reached an agreement with Chinese regulatory authorities that would allow US regulators to inspect the audit records of Chinese companies listed on US stock exchanges.

PCAOB chair Erica Y. Williams said in a statement that the agency signed a “statement of protocol” with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China, calling it “the first step toward opening access for the PCAOB to inspect and investigate completely registered public accounting firms in mainland China and Hong Kong.”

Hundreds of Chinese companies listed on US exchanges faced the possibility of being delisted under a law that took effect last year that bans securities trading in foreign companies if three consecutive years of audit working papers aren’t available to US inspectors.

“The US Congress sent a strong message with the passage of the Holding Foreign Companies Accountable Act that access to the US capital markets is a privilege, not a right,” Williams said. The new agreement with China gives the PCAOB complete access to the audit work papers, audit personnel, and other information it needs to inspect and investigate any firm it chooses, she added, “with no loopholes and no exceptions. But the real test will be whether the words agreed to on paper translate into complete access in practice.”

China had long resisted granting US inspectors access to companies’ audits, citing national security concerns. But the CSRC said in a statement following the agreement that it was “hopeful that the audit oversight issue of the US-listed Chinese companies will be resolved and delisting can be avoided,” noting that “audit work papers generally do not contain state secrets, individual privacy, companies’ vast user data, or other sensitive information.”

The deal marks the first time that China has agreed to such “detailed and specific commitments” to allow PCAOB inspectors that meet US standards, Securities and Exchange Commission chair Gary Gensler said in a statement.

As the Wall Street Journal first noted, however, there appears to be some discrepancy between the two countries’ public descriptions of the agreement. The PCAOB said in its statement that it had “sole discretion to select the firms, audit engagements, and potential violations it inspects and investigates—without consultation with, nor input from, Chinese authorities.”

The CRSC statement, however, said the two sides “will communicate and coordinate in advance to plan for inspections and investigations,” suggesting Chinese officials would have oversight of any investigations by US officials.

“Make no mistake: The proof will be in the pudding,” Gensler said. “While important, this framework is merely a step in the process. This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China. If it cannot, roughly 200 China-based issuers will face prohibitions on trading of their securities in the US if they continue to use those audit firms.”—KL

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