US Regulator's Hard Line on China Stocks: No Audit, No Listing

Chances of a deal between China and the US over audits of Chinese companies listed on US stock exchanges may be limited, given reports that US regulators will not accept any restriction on audits of companies listed in New York.

Sources with knowledge of the US public accounting regulator’s thinking have said it will not accept any restrictions on its access to the audit papers of Chinese companies listed in New York, including where firms have been delisted.

Washington and Beijing are in talks to settle a long-running dispute over the auditing compliance of US-listed Chinese firms which, if unresolved, could see more than 270 Chinese firms kicked off New York bourses.

Authorities in China have long been reluctant to let overseas regulators inspect local accounting firms, citing national security concerns.

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‘No Exceptions’

A person familiar with the thinking of the Public Company Accounting Oversight Board (PCAOB), which oversees audits of US-listed companies, said delisting Chinese companies would not bring Beijing in line with the US rules.

The PCAOB must be able to pick who it wishes to inspect, based on risk, the person said. “If the Chinese regulators are going to restrict us to any degree, that would not allow us to achieve the mandate and we would not accept it.”

The Financial Times reported on Sunday, citing sources, that China is preparing to categorise US-listed Chinese companies into groups based on the sensitivity of their data, in a potential concession to try to comply with the US rules. The sources declined to be identified because the discussions are private.

The China Securities Regulatory Commission (CSRC) denied the report on Monday. It did not immediately respond to a request for comment on Tuesday.

A PCAOB spokesman Kent Bonham said the “PCAOB must have complete access to audit work papers of any firm it chooses to inspect or investigate – no loopholes and no exceptions.”

“Time is of the essence as we continue working with [Chinese] authorities to reach an agreement that meets our mandate under US law,” he added.

Gensler ‘Not Confident’

China has previously said that both sides are committed to reaching a deal, although the United States has been more cautious on the outlook.

Gary Gensler, chair of the US Securities and Exchange Commission, which oversees the PCAOB, said this month that he was “not particularly confident” that a deal could be made.

The first source said the main sticking point relates to the level of access the PCAOB has to achieve its mandate.

“Chinese counterparts want various degrees of access, which we cannot accept. We need complete access.”

PCAOB inspections and investigations are retrospective, meaning audited financial statements are still subject to scrutiny even after delisting – which could take more than a year, said a second person familiar with the PCAOB’s thinking.

Long Simmering Spat

“A company may still have SEC filing requirements even after delisting – including audited financial statements that are subject to PCAOB inspection,” this person said.

Companies may still be required to file audited financial statements with the SEC, even if they are not listed on a US exchange, if for example they have more than 300 US shareholders or if the company trades securities in the US above a certain threshold off exchange, the second source added.

The oversight spat, which has been simmering for almost two decades, came to a head in December when the SEC finalised rules to delist Chinese companies under the Holding Foreign Companies Accountable Act. It said there were 273 companies at risk.

In May, a US Securities and Exchange Commission (SEC) official warned that the agency would need to be able to complete inspections by early November 2022 to meet a deadline that could land as early as 2023.