issuing time:
For the first time in its history, the PCAOB has been able to conduct a comprehensive inspection of Chinese audit firms. That resets the three-year delisting timetable facing Chinese companies listed on U.S. exchanges.
According to a report by Jing Yang / Michelle Chan in the Wall Street Journal today, the US regulator said it has been able to fully inspect the audit papers of Chinese companies. The U.S. audit watchdog said on Thursday that it conducted a recent inspection of the accounting firms without consulting with Chinese authorities, who did not provide an opinion.
For more than a decade, Chinese regulators have denied PCAOB inspections of China-based accounting firms or routine access to Chinese companies’ audit papers, citing national security concerns. The Chinese government softened its stance this year after the United States began enforcing the Holding Foreign Companies Accountable Act. The “Foreign Companies Accountability Act” stipulates that if the audit agency fails to accept inspections for three consecutive years, the company under audit will be forcibly delisted.
As of this summer, more than 160 companies had been flagged by the SEC as incompatible with the new law and could be delisted starting in 2024.
Erica Williams, chair of the PCAOB, said at a news conference that the statement should not in any way be misinterpreted as a certificate of compliance for companies in mainland China and Hong Kong. “It’s an acknowledgment that for the first time ever we’ve been able to conduct a full and thorough inspection and investigation to root out underlying problems and hold companies accountable to fix them,” she said.
The PCAOB recently sent 30 staff to Hong Kong for a nine-week on-site inspection, doubling the size of its normal inspection team. They stayed in Hong Kong three weeks longer than usual for such checks, Williams said. The committee examined the audit papers of eight companies, including state-owned enterprises and companies in sensitive industries, by two accounting firms, KPMG Huazhen LLP in the mainland and Luo Huazhen in Hong Kong. Bingham WaterhouseCoopers (PriceWaterhouseCoopers, namely PricewaterhouseCoopers).
The inspections were carried out between September and November after regulators in the United States and China reached a landmark agreement in August. The PCAOB has sole discretion in selecting companies to inspect and their audit papers, and can obtain testimony directly from all involved.
The PCAOB has identified a number of potential loopholes. According to Williams, the vulnerabilities are consistent with issues the agency has encountered in other first-of-its-kind inspections around the world. The audit watchdog said it would issue an inspection report in 2023.
According to the report, Paul Leder, who served as director of the SEC’s Office of International Affairs from 2014 to 2018, said that in China, there are very few situations in which non-public information is allowed to be taken out of China for use by U.S. regulators, such as the above inspection. one. He said the Chinese authorities may be making concessions because they don’t want to roil the market right now.
Jeremy Mark, a senior fellow at the Atlantic Council think-tank, said there was some deep concern over the past few years about a possible decoupling between the two markets in the United States and China, and there was now a moment of relief. Mark said the sharp downturn in China’s economy over the past year may have prompted the Chinese government to back down and allow U.S. inspections so that Chinese companies could retain U.S. listings. The last thing China wants to see is losing access to Wall Street, he said.
Dozens of U.S.-listed Chinese companies had embarked on secondary or dual listings in Hong Kong ahead of the U.S.-China audit agreement in August, according to the Wall Street Journal. Short-video platform Bilibili Co Ltd and Yum China recently converted their respective secondary listings in Hong Kong to primary listings to ensure they can continue to trade publicly on another major international exchange if their U.S. shares are delisted. Alibaba is doing the same. Five large Chinese state-owned companies, including two oil companies, recently took separate steps to voluntarily delist their shares from the United States. All five companies are on the SEC’s list of non-compliant companies.