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U.S. and China near deal to allow audit inspection of New York listed Chinese companies

Agreement could prevent many Chinese companies from being delisted from American stock exchanges

By Keith Zhai

August 25, 2022

The U.S. and China are nearing an agreement that would allow American accounting regulators to travel to Hong Kong to inspect the audit records of Chinese companies listed in New York, according to people familiar with the matter, as the two countries move toward resolving a yearslong standoff.

Securities regulators in Beijing are making arrangements for U.S.-listed Chinese companies and their accounting firms to transfer their audit working papers and other data from mainland China to Hong Kong, the people said.

Regulators from the U.S. Public Company Accounting Oversight Board would then travel to the semiautonomous city to perform on-site inspections of the Chinese companies’ auditors and their records, they added.

The China Securities Regulatory Commission recently informed some accounting firms and companies about the plan, the people said, adding that U.S. accounting inspectors could arrive in Hong Kong as soon as next month. A final agreement can only be reached if the U.S. side determines that it has full access to the audit working papers, they said. The CSRC said, in response to a Wall Street Journal query, that it doesn’t have any relevant information to disclose. The PCAOB declined to comment.

More than 200 U.S.-listed Chinese companies are facing the prospect of being booted off American stock exchanges starting in early 2024, if their auditors can’t be inspected by the PCAOB for three consecutive years. Around 160 companies—including Alibaba Group Holding Ltd. BABA, +7.97%, JD, +9.20% and Baidu Inc. BIDU, +8.73% —have so far been identified as noncompliant with the Holding Foreign Companies Accountable Act, which took effect last year.

For years, regulators in China were reluctant to allow such inspections, and argued that unfettered access to companies’ audit papers and their data could threaten the country’s national security. Y.J. Fischer, an official with the U.S. Securities and Exchange Commission, recently said such a claim is “questionable at best.” Since the HFCAA took effect, authorities in China have expressed a desire to find a way to comply with the law.

As the threat of involuntary delistings looms, some U.S.-listed Chinese companies, including Alibaba and Yum China Holdings Inc., are planning to convert their secondary listings in Hong Kong to primary listings. That would allow their shares to continue trading in the Asian financial hub if they are kicked off U.S. exchanges.


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