Daily Management Review

The US-China Audit Deal Explained


The US-China Audit Deal Explained
Beijing and Washington have agreed in principle to allow U.S. regulators to review the audits of Chinese companies that are listed on American exchanges, potentially putting an end to a dispute that had threatened to delist 200 Chinese companies, including Alibaba, from American stock exchanges.
US regulators have long requested access to the audit records of Chinese companies that are traded on the American stock exchange, but Beijing has been hesitant to grant such requests due to security reasons. see more.
The China Securities Regulatory Commission (CSRC) and the U.S. Public Company Accounting Oversight Board (PCAOB) did not release the full agreement on Friday, but they did provide highlights:
At least in theory, Beijing gave the United States the access to Chinese audit documents that it had long demanded.
The agreement forbids China from omitting or redacting any information from audit documentation for any reason, and it permits the PCAOB to directly question employees of audit companies in China as part of its investigations. The federal U.S. securities regulator that oversees the PCAOB, the Securities and Exchange Commission, can also receive information from the PCAOB.
The CSRC may classify some data, including personally identifiable information, as "restricted" and subject to a "view only" review by a small number of U.S. inspectors even though China is not permitted to redact information. Officials from the PCAOB claimed on Friday that the regulator has similar agreements with other nations. Importantly, according to officials, the PCAOB can continue to keep restricted data if necessary, subject to a special procedure.
Chinese companies listed in the United States may be chosen for inspection at the PCAOB's sole discretion. American officials claimed on Friday that the decision is made after a risk assessment that takes into account factors like the company's size and industry. They also emphasized that Chinese companies being delisted wouldn't protect them from being chosen. Selected companies were notified by US officials on Friday, according to officials.
Initial inspections will take place in Hong Kong's Special Administrative Region, which is governed by the "one country, two systems" formula and has extensive autonomy, judicial independence, and other freedoms not available in mainland China until 2047.
According to PCAOB and SEC officials, Hong Kong was chosen because its COVID-19 protocols, particularly its quarantine rules, were more lax than those of China. However, mainland China is still open to future U.S. inspections.
By the middle of September, PCAOB inspectors will travel to Hong Kong.
US officials emphasized that the agreement did not imply that China was abiding by its rules. Once U.S. investigators have finished their inspections and are satisfied that China gave them the full access promised, they will decide on that.