After more than a decade of obstacles to U.S. regulatory inspections of Chinese companies’ auditors, Chinese authorities have been uncharacteristically vocal in recent months about their desire to resolve what has become a major drag on Chinese stocks. listed overseas such as the Alibaba Group. While carrying ltd.
and Baidu Inc.
The change in tone came as a three-year countdown for China to comply with the 2020 Foreign Company Liability Act looks increasingly likely to be shortened. Reaching and executing any deal would involve a lengthy process, and the new timeline could see US stock trading bans for some Chinese companies begin as early as next March.
The China Securities Regulatory Commission, the agency that coordinates Chinese government responses to the talks, has issued several statements this year signaling progress has been made in negotiations with their US counterparts.
In a statement to the Wall Street Journal on Tuesday, the CSRC said, “China and the United States maintain close communications and are committed to entering into collaborative agreements consistent with the laws and regulations of both countries. Overall, the negotiation process is going smoothly.
The Securities and Exchange Commission and the US accounting regulator, the Public Company Accounting Oversight Board, have meanwhile been more cautious about the prospect of a deal being struck and then implemented.
“We continue to meet and engage with PRC authorities, and speculation about a final agreement remains premature,” the PCAOB said in a statement to the Journal, referring to the People’s Republic of China. “It is important to note that reaching an agreement, while an important and necessary first step, will not on its own satisfy the requirements of the HFCAA,” the statement said.
The central question is whether China will allow the PCAOB to regularly inspect auditors of Chinese companies listed in the United States, a 20-year requirement under US law for all companies whose shares trade on US stock exchanges. . China has long argued that unhindered access to audit documents could threaten its national security, as some of the companies are state-owned, do business with state-owned companies or hold large amounts of data on Chinese citizens. .
Beijing’s broad view of what constitutes a national security risk is one of the reasons for the standoff. For example, pure information from major Chinese companies could provide insight into the country’s economy that is not apparent in China’s tightly controlled official data.
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The HFCAA went into effect in 2021 and prohibits trading in the United States of securities of companies whose auditors cannot be inspected by the PCAOB for three consecutive years. This gives Beijing until spring 2024 to comply.
However, bills that would shorten the one-year deadline have passed both the House and the Senate. That means the legislation would likely be included in a larger “Chinese bill” that is still being negotiated and which aims to boost US competitiveness against China. SEC Chairman Gary Gensler supports the shortened schedule.
If the bill passes later this year and China-based auditors still cannot be inspected, Chinese companies could be delisted from March 2023, once their 2022 annual reports are published. The CSRC said the proposed acceleration of the schedule is “not conducive to protecting the interests of investors, or addressing audit oversight issues.”
The SEC has identified 148 companies as non-compliant following the release of their latest annual reports, including Chinese e-commerce giants JD.com Inc.
and Pinduoduo Inc.
and restaurateur Yum China Holdings Inc.
“There’s a good chance the accelerated schedule will be enacted as part of an overarching China bill or as a standalone measure by the end of the year,” said partner Clete Willems. based in Washington at Akin Gump Strauss Hauer & Feld and former trade negotiator in the Trump administration.
This means that Beijing may only have a few weeks left to strike a deal with Washington that would allow PCAOB representatives to travel to China and begin inspections, as those inspections could take several months, experts said. industry and people familiar with the matter.
“The purpose of the bill is not to kick companies off the exchange. The purpose is to enforce PCAOB oversight,” said U.S. Representative Brad Sherman (D., Calif.), who presented the House’s version of the expedited deadlines bill Shortening the deadline “will lead to faster negotiations,” he said in an interview.
In recent closed-door meetings with Chinese companies and international investors, the CSRC said it was working to reach an agreement by the end of June, according to people familiar with the matter.
“Right now, the United States has the greatest leverage to force China to negotiate a deal,” said Shaswat Das, who was the PCAOB’s lead negotiator on audit oversight with Chinese officials. from 2011 to 2015. “The HFCAA laid the groundwork for the recent discussions between the PCAOB and Chinese authorities that will likely culminate in an agreement this summer,” said Das, who is now an attorney at King & Spalding LLP in Washington. .
However, China’s policy of eradicating Covid-19, keeping its international borders closed and blocking megacities could also delay the time for on-site inspection by US authorities.
Even if an agreement is reached that would allow US regulators to inspect auditors in China, the PCAOB would need sufficient access to the companies’ audit documents before determining that China as a jurisdiction is HFCAA compliant. .
“An agreement without successful execution will not satisfy U.S. law,” the PCAOB said in the statement, adding that it “must have the unlimited ability to choose” which auditors and their clients’ audit documents to inspect.
The scope and depth of these inspections was a contentious point in previous rounds of talks. In pilots in 2016, China handed over heavily redacted audit documents and barred the PCAOB from accessing the records of China’s most valuable U.S.-listed companies, including Alibaba. Chinese officials were also present during the interviews the PCAOB conducted during the inspection, which could interfere with the process. Eventually, the negotiations failed.
There are currently over 250 Chinese companies listed on US stock exchanges. The PCAOB does not have to inspect all of its initial-stage audit documentation, but it must be able to review a meaningful sample to determine that China, as a jurisdiction, is HFCAA compliant.
All in all, it could be a painstaking process, even if China makes concessions in areas it was previously unwilling to do.
“Time is running out, and unless China shows more flexibility than it has done today, delisting of some or all of its companies is inevitable,” Willems said.
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