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U.S. and China sign agreement on audit firm supervision

Written on Sep 13, 2022

The PCAOB has signed an agreement with Chinese authorities that will allow the board to inspect and investigate audit firms based in China and Hong Kong whose clients trade on American exchanges.  

The PCAOB inspection team plans to begin audit inspections in mid-September. 

The PCAOB and China have been in on-again, off-again negotiations to carry out audit inspections. China has so far not granted full access to audit papers fearing that audit work papers may contain state secrets.  

Some analysts say that if the agreement can be implemented, it will effectively slow down the “delisting tide” of Chinese companies on the American stock exchanges. So far, about 160 Chinese companies, including Alibaba, Baidu, JD.com and other big companies, have been included on a list of companies scheduled to be delisted in the U.S. market because they did not meet U.S. audit standards. 

So far, there are more than 200 Chinese companies listed in the U.S. If the audit documents of these companies fail to be checked by the PCAOB for three consecutive years, they may be delisted from the American stock exchanges starting in 2024. 

According to the Wall Street Journal, in recent weeks Chinese regulators have told some Chinese companies that the government will support them in listing in the U.S. as long as they “comply with domestic regulations on data security and information protection.” 

Chinese regulators have also indicated they will allow U.S. accounting regulators “unrestricted” access.  

Although both the U.S. and China have reached a consensus, the two sides have different language on the procedural presentation of how to check audit papers. 

The PCAOB said in a statement that the agency “has the right to choose, at its own discretion, the companies, audit engagements and potential violations it examines and investigates” without “consulting or providing advice from Chinese authorities.” 

However, the China Securities Regulatory Commission said that the U.S. side must obtain audit papers through Chinese regulators and inquire about the firm’s relevant personnel “with the participation and assistance of the Chinese side.” The agency emphasizes “establishing the principle of reciprocity.” 

Although the agreement has been signed, how the two countries will negotiate and implement the agreement will become the focus in the future.