U.S. and China Agreement on Audit Inspection to Avoid Delisting

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On August 26, 2022, China and The United States agreed to allow American officials from the Public Company Accounting Oversight Board (PCAOB) to inspect and investigate China-based accounting firms. The audit agreement between the two countries is an initial step for roughly 200 Chinese companies not to be delisted from U.S. stock exchanges.

This agreement marks a significant milestone in the decades-long standoff between two economic superpowers over access to audit documents. China & Hong Kong are the only two jurisdictions worldwide that have not allowed PCAOB inspections citing national security and confidentiality concerns. However, the agreement signed on Friday was a rare compromise between China and the U.S. to balance the importance of China’s national security and business needs.

Chairperson Gary Gensler stated that the Chinese and U.S. authorities agree to establish a framework before PCAOB inspectors are sent abroad to investigate audit firms. The agreement will only be meaningful if the board can thoroughly inspect and examine the audit firms in China. If it fails, the 200 Chinese companies listed in the U.S. will face prohibitions on trading their securities if they continue to use those audit firms. The U.S. SEC Chairperson also said he expects PCAOB to start inspections by mid-September to attempt a successful completion by the end of this year.

Chinese authorities have committed to four critical items in following the requirements of U.S. law and PCAOB auditing standards:

  • Following Sarbanes-Oxley Act, PCAOB should have independent discretion to select any issuer audits for inspection or investigation
  • The PCAOB should get direct access to interview or take testimony from all personnel of the audit firms whose issuer engagements are being inspected or investigated.
  • PCAOB should have the unfettered ability to transfer information to U.S. SEC
  • PCAOB inspectors can see complete audit work papers without any redactions on a “view only” basis.

Suppose the investigation succeeds without any issues. Chinese companies listed in the U.S. may be rewarded in return, as investors predict a re-valuation of some of the most prominent Chinese tech companies. On the other hand, three of China’s biggest state-owned companies, namely, China Life Insurance Co., PetroChina Co., and China Petroleum & Chemical Corp., disclosed their intentions to voluntarily delist from the New York Stock Exchange last August 12. However, it is not indicated that the action was related to the audit dispute.

The agreement is a necessary step toward solidifying a better business relationship between the two countries which now relies on cooperation and adherence to compliance.

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