PCAOB, Chinese authorities reach deal as delisting threat looms

Dive Brief:

The Public Company Accounting Oversight Board (PCAOB) and chair Erica Y. Williams announced Friday that the audit watchdog had reached a long-sought agreement with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of the People’s Republic of China, marking the first step toward the PCAOB gaining “complete access” to inspect public accounting firms based in mainland China and Hong Kong.
The cooperation could avert a threatened delisting that some New York-listed Chinese companies faced as U.S. regulators asserted that China had blocked their access to financial reports.The CSRC in a statement expressed optimism that the agreement would ease those tensions, saying “it is hopeful that the audit oversight issue of the U.S.-listed Chinese companies will be resolved and delisting can be avoided.”
While noting that the deal marked the first time China has given such detailed and specific commitments to allow PCAOB inspections, Securities and Exchange Commission Chair Gary Gensler cautioned in a statement Friday that it was an early step in a longer-term process. “The proof will be in the pudding …This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China. If it cannot, roughly 200 China-based issuers will face prohibitions on trading of their securities in the U.S. if they continue to use those audit firms.”

Dive Insight

U.S. regulators have taken steps to make sure Chinese companies are in compliance with U.S. auditing standards and both Williams and Gensler recently reiterated the importance of obtaining full access to the audits of Chinese companies. Gensler did so again Friday.

“It’s a privilege for foreign issuers to access our markets — the largest, deepest, most liquid markets in the world. Investors in U.S. markets should be protected — and have trust in a company’s financial numbers — regardless of whether an issuer is foreign or domestic,” Gensler said in a statement. “Further, if foreign issuers want access to our public capital markets, they must be on a level playing field with U.S. firms.”

Last year the SEC took a step toward de-listing non U.S. companies from U.S. exchanges if federal authorities can’t be sure accounting firms in uncooperative jurisdictions are following U.S. auditing standards.

The PCAOB doesn’t have the authority to remove foreign companies from U.S. exchanges but a law the federal government enacted in 2020, the “Holding Foreign Companies Accountable Act,” (HFCAA), gives the SEC authority to do so if the PCAOB isn’t getting cooperation.