US and China close to agreement to allow audit inspection of Chinese companies listed in NY

US and China close to agreement to allow audit inspection of Chinese companies listed in NY

SINGAPORE – The US and China are closing in on a deal that will allow US accounting regulators to travel to Hong Kong to inspect the audit records of Chinese companies listed in New York, according to people familiar with the matter, as the two countries move forward. to resolve an issue. years impasse.

Securities regulators in Beijing are making arrangements for US-listed Chinese companies and their accounting firms to transfer their audit work documents and other data from mainland China to Hong Kong, the people said.

Regulators from the US Public Company Accounting Oversight Board would then travel to the semi-autonomous city to conduct on-site inspections of Chinese companies’ auditors and their records, they added.

The China Securities Regulatory Commission recently informed some companies and accounting firms about the plan, the people said, adding that US accounting inspectors could arrive in Hong Kong next month. A final agreement can only be reached if the US side determines it has full access to the audit working papers, they said.

The CSRC said, in response to a Wall Street Journal inquiry, that it has no relevant information to disclose. The PCAOB declined to comment.

Earlier this month, Erica Williams, chairman of the PCAOB, told the Journal that US accounting inspectors and investigators were prepared to travel to inspect Chinese companies’ audit work papers once an agreement was in place.

“We have teams packed, bags packed and ready to go – if we have a deal reached, we can really test that deal and make sure what we have in the deal on paper is actually working in practice,” said Ms. Williams said, adding that she herself is prepared to go if necessary.

PetroChina, a major Chinese oil and gas producer, said it intends to delist its shares from the New York Stock Exchange.


Photograph:

Bloomberg News

More than 200 US-listed Chinese companies face the prospect of being expelled from US stock exchanges starting in early 2024 if their auditors cannot be inspected by the PCAOB for three consecutive years. Around 160 companies – including Alibaba Group Holding Ltd., JD.com and Baidu Inc. – have so far been identified as not compliant with the Holding Foreign Companies Accountable Act, which came into force last year.

For years, China’s regulators have been reluctant to allow such inspections and have argued that unrestricted access to the companies’ audit documents and their data could threaten the country’s national security. YJ Fischer, an official with the US Securities and Exchange Commission, recently said that such a claim is “questionable at best.”

Since the HFCAA came into force, authorities in China have expressed a desire to find a way to enforce the law.

Meanwhile, US securities regulators said they need full access to companies’ unedited audit documents before they consider China to comply. SEC Chairman Gary Gensler said a framework that allows them to inspect and investigate Chinese auditors is just one step in the process and “the proof will be in the pudding.” These inspections can take several months to complete.

Chinese regulators have told some companies in recent weeks that the government will support them to be listed in the US as long as the companies comply with domestic regulations on data security and protection of personal information, according to people familiar with the matter. The regulators have also indicated that they will allow US accounting regulators unrestricted access to the audit records of companies in Hong Kong, they added.

As the threat of involuntary closures looms, some US-listed Chinese companies, including Alibaba and Yum China Holdings Inc., are planning to convert their secondary listings in Hong Kong to primary listings. This would allow their shares to continue trading in the Asian financial center if they were kicked off US exchanges.

Five Chinese state-owned companies, including one of China’s largest oil and gas producers, PetroChina Co., said earlier this month that they intend to delist their US depositary shares from the New York Stock Exchange. They cited low US trading volumes and the administrative burden and costs of maintaining their New York listings.

write to Keith Zhai at keith.zhai@wsj.com

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