SINGAPORE – The US and China are close to an agreement that would allow US accounting regulators to travel to Hong Kong to review audit records of Chinese companies listed in New York, according to people familiar with the matter, as the two sides move toward a resolution a long-standing concern.
Securities regulators in Beijing are making arrangements for U.S.-listed Chinese companies and their accounting firms to transfer their audit work papers and other data from mainland China to Hong Kong, the people said.
Regulators from the US Public Company Accounting Oversight Board will then travel to the semi-autonomous city to conduct 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 may arrive in Hong Kong as soon as next month. A final agreement can only be reached if the US side decides it has full access to the audit’s working papers, they said.
The CSRC said in response to a Wall Street Journal inquiry that it did not have relevant information to disclose. The PCAOB declined to comment.
Earlier this month, Erica Williams, chairwoman of the PCAOB, said in an interview with the Journal that U.S. auditors and investigators are prepared to travel to inspect the audit work papers of Chinese companies when there is a settlement.
“We’ve got the teams ready, the bags are packed and we’re ready to go – if we have an agreement that’s reached so we can actually test that agreement and make sure that what we have in the agreement on paper actually works in practice.” , Ms. Williams said, adding that she herself is willing to go if she has to.
More than 200 US-listed Chinese companies face the prospect kicked out of US stock exchanges beginning in early 2024 if their auditors cannot be inspected by the PCAOB for three consecutive years. About 160 companies — including Alibaba Group Holding Ltd., JD.com and Baidu Inc. – have so far been identified as non-compliant with the Foreign Companies Liability Act, which came into effect last year.
For years, regulators in China are reluctant to allow such checks, and claims that unrestricted access to the companies’ audit documents and their data could threaten the country’s national security. YJ Fischer, an official at the US Securities and Exchange Commission, recently said such a claim was “dubious at best.”
Since the HFCAA went into effect, authorities in China have expressed a desire to find a way to comply with the law.
US securities regulators, meanwhile, have said they need full access to the companies’ unredacted audit filings before they consider China in compliance. SEC Chairman Gary Gensler said a framework allowing them to inspect and investigate Chinese auditors was just a step in the process and “the proof will be in the pudding.” These checks may take several months to complete.
Chinese regulators have told some companies in recent weeks that the government will back their U.S. listings as long as the companies comply with internal regulations on data security and the protection of personal information, say insiders. Regulators also indicated they would allow U.S. accounting regulators unrestricted access to the audit records of Hong Kong companies, they added.
As the threat of involuntary delistings rises, some U.S.-listed Chinese companies, including Alibaba and Yum China Holdings Inc., plan to convert their secondary listings in Hong Kong to primary listings. This will allow their shares to continue to trade in the Asian financial center if they are delisted in the US.
Five Chinese state-owned companies, including one of China’s largest oil and gas producers PetroChina Co., said earlier this month that intend to delete their American Depositary Shares from the New York Stock Exchange. They cited low US trading volumes and the administrative burden and costs of maintaining their New York listings as reasons for their decisions.
— Jing Yang, Mark Maurer and Jean Eaglesham contributed to this article.
Write to Keith Jai c [email protected]
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