US and China reach deal on audits of listed companies
The deal may stop 200 Chinese firms from losing their US stock exchange listings
China has agreed to give U.S. regulators access to Chinese accounting firms that audit U.S.-traded Chinese companies. The Public Company Accounting Oversight Board (PCAOB) signed a deal, announced Friday, with the China Securities Regulatory Commission and the Ministry of Finance. The agreement represents a significant concession that could prevent some 200 Chinese firms from being delisted from U.S. stock exchanges.
The pact is first step toward opening access for the U.S. accounting regulator to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong completely, consistent with U.S. law.
"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," said PCAOB chair Erica Williams.
Gary Gensler, Chair of the Securities and Exchange Commission (SEC), testifies during the Senate Banking, Housing, and Urban Affairs Committee hearing on "Oversight of the US Securities and Exchange Commission" on Sept. 14, 2021 in Washington, D.C. ((Photo by BILL CLARK/POOL/AFP via Getty Images) / Getty Images)
The move marks what could be progress in a long-running standoff between Beijing and Washington over auditing compliance on Chinese firms listed in the U.S.
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Securities and Exchange Commission (SEC) Chair Gary Gensler emphasized the agreement was "merely a step in the process," even though it was the first time the U.S. has received such detailed and specific commitments from China. The PCAOB will now be able to conduct inspections and investigations meeting U.S. standards.
The U.S. and Chinese use different accounting standards. The U.S. follows Generally Accepted Accounting Principles (GAAP). China's national standards are substantially converged with International Financial Reporting Standards (IFRS).
The US and China have been in a dispute over audit oversight for Chinese-based firms for over a decade. (iStock / iStock)
Gensler also expressed a sense of urgency for hammering out further details, saying that PCAOB must be allowed "on the ground" in China "by mid-September" in order to assure that inspections and investigations by the U.S. regulatory authority can be conducted by the end of the year.
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The SEC chair also said that if the PCAOB is not allowed the access and oversight needed from Chinese authorities, "roughly 200 China-issuers will face prohibitions on trading of their securities in the U.S. if they continue to use those audit firms."
People exit the headquarters of the U.S. Securities and Exchange Commission (SEC) in Washington, D.C., May 12, 2021. (REUTERS/Andrew Kelly/File Photo / Reuters)
The dispute between the two nations has been ongoing for more than a decade, with the PCAOB demanding full access to oversee the audits of Chinese companies listed in New York as required by U.S. law. Until this new agreement, China had refused, citing national security concerns.
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The SEC began tightening the screws in December when the agency finalized rules threatening to boot Chinese companies from U.S. exchanges under the Holding Foreign Companies Accountable Act.
"The U.S. Congress sent a strong message with the passage of the Holding Foreign Companies Accountable Act that access to the U.S. capital markets is a privilege, not a right," said PCAOB's Williams.
Reuters contributed to this report.