US regulators have begun inspecting China-based audits, starting a months-long process that will determine whether Alibaba BABA companies -1.09%
Group Holding Ltd. for Yum China YUMC -2.94%
Holdings Inc. may remain listed on US stock exchanges.
The inspection, which is expected to last eight to 10 weeks in Hong Kong, will allow the US audit watchdog to decide by the end of this year whether China is honoring a landmark agreement to give US accounting inspectors full access to New York-listed Chinese companies audit working papers.
“The time for negotiations is over. The agreement was signed. And it must be followed through,” Erica Williams, chair of the Public Enterprise Accounting Oversight Board, said Thursday. “Any interference with our ability to retain information as needed is a deciding factor.”
Speaking at the Council of Institutional Investors’ autumn conference, Williams said PCAOB teams began arriving in Hong Kong last week and will carry out inspections at audit firms in mainland China and Hong Kong. Inspectors will examine audits of selected companies and the quality control systems of auditing companies.
The PCAOB is expected to review audits of some of the most valuable Chinese companies listed in the US, including Alibaba, Yum China, NetEase Inc.
and JD.com Inc.,
The Wall Street Journal previously reported.
The Hong Kong unit of PricewaterhouseCoopers and the Chinese units of KPMG, PwC and Deloitte are their respective auditing firms, according to PCAOB filings.
All four – along with more than 160 Chinese companies – have been identified as incompatible with the Holding Foreign Companies Accountable Act, which took effect last year. If the PCAOB does not fully inspect auditing firms in China, around 200 Chinese companies valued at more than $1.15 trillion would be delisted from US stock exchanges starting in early 2024.
Officials from the China Securities Regulatory Commission and China’s Ministry of Finance are also on the ground coordinating and assisting the inspection, according to people familiar with the matter. The PCAOB declined to comment on the inspections.
It is common for representatives from both countries to sit in conference rooms to observe inspection arrangements and ensure that inspectors can carry out their work without any interference, said Jackson Johnson, president of Johnson Global Accountancy and a former inspector for the PCAOB.
Audit firms’ working partners, who oversee the audit work and sign the audit report, will typically be asked about the firm’s internal controls, revenue recognition principles and remote auditing policies during the pandemic, Johnson added.
In addition to audit working papers, internal documents, including email exchanges between auditors and their issuing clients, may be subject to scrutiny if inspectors deem the information necessary, said Salvatore Collemi, founder of Collemi Consulting & Advisory Services LLC, that advises accounting firms in auditing. quality control.
For years, Chinese authorities have denied US regulators access to the records, citing national security concerns. However, the Chinese securities regulator said last month that audit working papers generally do not contain state secrets, personal data or other confidential information.
Some Chinese companies have sought alternative or primary listings in Hong Kong to hedge the risk of delisting. Last month, five Chinese state-owned companies said they would withdraw their US escrow shares, but could still be subject to retrospective PCAOB inspections.
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