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China announces an Audit Oversight agreement with U.S. PCAOB

Written by Cláudio Afonso | info@claudio-afonso.com | LinkedIn | Twitter

China Securities Regulatory Commission said on Friday that it entered an audit oversight cooperation agreement with the U.S. Public Company Accounting Oversight Board (PACOB) and the Ministry of Finance of the People’s Republic of China.

As of press time, U.S.-listed Chinese companies are trading around 3-4% higher in the pre-market session.

PCAOB Chair Williams commented, “As part of our ongoing efforts, this morning, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China – the first step toward opening access for the PCAOB to inspect and investigate completely registered public accounting firms in mainland China and Hong Kong”.

“On paper, the agreement signed today grants the PCAOB complete access to the audit work papers, audit personnel, and other information we need to inspect and investigate any firm we choose, 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,” Williams added.

The agreement establishes “a cooperation framework in line with the authorities’ respective laws and regulatory mandates” and “sets out specific arrangements on conducting inspections and investigations by both sides over relevant audit firms within the jurisdiction of both sides”.

“The signing of the agreement is an important step forward by regulators in China and the U.S. towards resolving the audit oversight issue that concerns mutual interests, and lays the foundation for proactive, professional and pragmatic cooperation of the next stage,” China Securities Commission said.

The commission added that promoting cross-border audit oversight cooperation will “further enhance the audit quality of the auditors, protect the legitimate interests of investors, and foster a sound international regulatory environment for companies”.

On Thursday, WSJ had reported that talks between the U.S. and China over audit-paper access could see an important step ahead of the agreement between the countries which would avoid the delisting of over 200 U.S.-listed Chinese companies.

Some of the biggest names on the list are PinDuoDuo, JD.com, Alibaba, NIO, Netease, XPeng, and Baidu. In early May, US SEC had updated the Holding Foreign Companies Accountable Act (HFCAA) list adding NIOXPeng, and many other Chinese companies.

According to the law approved in late 2020, the companies on the list used an auditor “whose working paper cannot be inspected or investigated completely by the PCAOB”. Previously, on April 22, also the Chinese automaker LI Auto was added to the HFCAA list.

According to WSJ, the China Securities Regulatory Commission had already informed some accounting companies about the arrival in Hong Kong in September reaching a final agreement if the U.S. entities agree that full access to the audit working papers was given by China.

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On August 1, during an interview at Bloomberg’s Washington office, U.S.-PCAOB chair Erica Williams said the U.S.-China talks over audit-paper access are ongoing reiterating the need for complete access.

The chair of the Public Company Accounting Oversight Board said “We need to have complete access” [to the audit papers] adding that PCAOB has teams ‘ready to go” to the country if an agreement is reached, meaning “no loopholes”.

On July 25, China’s Securities Regulator denied a report that said Beijing was working on a 3-tier plan to avoid the delisting of around 260 U.S.-listed Chinese companies. One day earlier, FT had reported Beijing was planning to sort the firms into three different groups considering the sensitivity of the data they hold.

In a statement released one week ago, the regulator said “Enterprises are required to comply with relevant national data information management laws, rules and regulatory requirements of the place of listing, regardless of whether they are listed domestically or overseas”.

In 2020, Congress said that “it’s time for audit firms in all jurisdictions around the world to comply fully with Sarbanes-Oxley” approving a new rule to delist firms from the U.S. Stock Market if they don’t open their work papers to PCAOB inspection for three consecutive years.

The approval says, if governmental authorities don’t allow the auditors of foreign companies “to open their work papers to PCAOB inspection for three consecutive years”, the securities of companies audited by those firms could be “prohibited from trading in the U.S.”.

With the new rules, investors will be able to quickly identify registrants whose auditing firms are located in a foreign jurisdiction that the PCAOB cannot completely inspect, U.S. SEC Chair Gary Gensler said in December 2021.

“The Commission and the PCAOB will continue to work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by our rules. We hope foreign governments will working with the PCAOB, take action to make that possible,” he added.

Earlier this month, Bloomberg reported U.S. Public Company Accounting Oversight Board (PCAOB) and the China Securities Regulatory Commission and the Ministry of Finance held calls with the negotiations “reaching a critical point”. Bloomberg added that the “redactions in auditors’ documents are a key barrier” to reaching a deal.

In early May, US SEC updated the Holding Foreign Companies Accountable Act (HFCAA) list adding NIO, XPeng while the PHEV maker LI Auto was added in late April. When both EV makers were added to the list, NIO answered by saying it will “continue to comply with applicable laws and regulations in both China and the United States” and also “strive to maintain its listing status on both the NYSE and the HKEX in compliance with applicable listing rules”.

Written by Cláudio Afonso | info@claudio-afonso.com | LinkedIn | Twitter

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