(Bloomberg) — The U.S. audit watchdog said speculation about a deal that would keep hundreds of Chinese companies from being kicked off American stock exchanges is “premature.”
In a statement on Thursday, the Public Company Accounting Oversight Board said that while it continues to meet with Chinese regulators, it’s unclear if Beijing authorities will ultimately permit U.S. inspectors to fully review the audit papers of companies. The regulator added that any agreement would only be a “first step” and that the PCAOB would then investigate to ensure that the deal is being followed.
While Washington and Beijing have been at odds for two decades over the mandate that all companies that trade publicly in the U.S. grant access to audit work papers, the issue prompted action on Capitol Hill at the end of the Trump administration, when American lawmakers required that non-compliant firms be delisted. The law is particularly threatening to companies based in China and Hong Kong because Beijing has refused to grant access to corporate audits, citing national security concerns.
“While we will continue our work to find practical solutions to address the concerns of PRC authorities, ultimately, full access to relevant audit documentation is necessary to carry out our mandate on behalf of investors,” the PCAOB said in a statement. “This is not negotiable, even with respect to issuers in sensitive industries.”
The China Securities Regulatory Commission is weighing a proposal that would allow U.S. regulators to inspect audit papers for some companies as soon as this year, Bloomberg News reported earlier this month. However, under the plan the CSRC would still seek to retain some ability to withhold sensitive data from inspection by the PCAOB.
Since Congress passed the law in 2020, the PCAOB and Securities and Exchange Commission have been laying the groundwork for identifying and delisting companies that don’t comply. Firms face removal if they shirk requirements for three straight years, meaning they could be kicked off the New York Stock Exchange and Nasdaq as soon as 2024.
In its statement on Thursday, the PCAOB said it continues to meet with CSRC authorities to try to reach an agreement that allows American inspectors “the access required to inspect and investigate completely auditors headquartered in mainland China and Hong Kong.” The U.S. watchdog said it required “full access to audit work papers, firm personnel, and any other relevant information related to such audit engagements.”
Nasdaq’s Golden Dragon China Index of companies listed in the U.S. dropped 3.7% at 11:16 a.m. Thursday in New York. On March 16, the index jumped the most on record after President Xi Jinping’s government said it supports firms whose shares trade overseas and that progress was being made in talks with U.S. regulators.
Those comments came after the SEC earlier this month started publishing a “provisional list” of stocks that could face removal. While the move had long been telegraphed, the list fueled a sharp decline in U.S. shares of companies based in China and Hong Kong.
So far, the SEC has identified six companies that face potential delisting from New York exchanges, including Weibo Corp., which was added on Wednesday. In all, the PCAOB has said it’s blocked from reviewing the audits of more than 200 companies based in China or Hong Kong, including Alibaba Group Holding Ltd. and Baidu Inc. All of them are expected to be on the SEC’s list in the next few months. Chinese companies traded in the U.S. have a combined market capitalization of hundreds of billions of dollars.
(Updates with Nasdaq Golden Dragon Index move in eighth paragraph.)
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