China Faces Growing Pressure to Iron Out Audit Deal With the U.S.

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If Beijing wants to make sure its companies don’t close US exchanges next year, it may have only a few weeks left to reach an agreement.

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The tone has changed as the three-year countdown for China to comply with the Holding Foreign Companies Accountable Act of 2020 seems increasingly likely. Any deal would require a lengthy process to execute and execute, and the new timetable could see US stock-trading restrictions for some Chinese companies begin as early as next March.

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The China Securities Regulatory Commission, the agency coordinating the Chinese government’s responses to the talks, has issued several statements this year indicating progress has been made in talks with their US counterparts.

In a statement to Businesshala on Tuesday, the CSRC said: “China and the United States maintain close communication and are committed to reaching a cooperative arrangement that complies with the laws and regulations of the two countries. Overall, the negotiation process is smooth.” running smoothly.”

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On the other hand, the Securities and Exchange Commission and the US accounting regulator, the Public Company Accounting Oversight Board, have been more cautious about the likelihood of a deal being reached and then enforced.

“We continue to meet and engage with PRC officials, 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 alone will not meet the requirements of the HFCAA while being an important and necessary first step,” the statement said.

The main issue is whether China will allow the PCAOB to conduct regular inspections of auditors of US-listed Chinese companies, a 20-year-old requirement under US law for all companies whose shares trade on US exchanges. China has long argued that access to audit papers could threaten its national security, as some companies are state-owned, do business with state-owned companies, or impose large amounts on Chinese citizens. holds data.

Beijing’s broad view of what constitutes a national-security risk is one reason for the impasse. For example, a mix of large Chinese companies can provide insight into the country’s economy that is not evident in China’s tightly controlled official data.

The HFCAA took effect in 2021 and banned the US trading of securities of companies whose auditors could not be inspected by the PCAOB for three consecutive years. This gives Beijing time to follow through until spring 2024.

However, bills that would reduce the deadline by one year have been passed by both the House and Senate. That means the law would be included in a broader “China bill” that is still under negotiation, and which aims to boost America’s competition against China. SEC Chairman Gary Gensler supports the abbreviated timetable.

If the bill passes later this year, and China-based auditors cannot be inspected, Chinese companies could be asked to do so starting in March 2023, after their 2022 annual reports are published. The CSRC said the proposed acceleration of the timeline “is not conducive to protecting investor interests, nor to address issues of audit oversight.”

The SEC has identified 148 companies as non-compliant after releasing its latest annual report, including Chinese e-commerce giant JD.com. Inc.

and pinduoduo Inc.

and restaurant operator Yum China Holdings Inc.

“There is a good chance that the accelerated timeline could be enacted as part of a broader China bill or as a stand-alone measure by the end of the year,” said Clatte Willems, Washington-based partner at Ekin Gump Strauss Hauer & said. Feld and former trade negotiator in the Trump administration.

Industry experts and people familiar with the matter said that meant Beijing could actually have only weeks left to reach an agreement with Washington that would enable PCAOB representatives to travel to China and begin inspections. because those inspections can take several months to complete.

“The bill is not intended to exclude companies from the exchange. Its purpose is to enforce PCAOB oversight,” said US Representative Brad Sherman (D., Calif.), who introduced the House version of the accelerated timeline bill. “Shortening the timeline will speed up negotiations,” he said in an interview.

In recent closed-door meetings with Chinese companies and international investors, the CSRC said it was working towards the goal of reaching a deal by the end of June, according to people familiar with the matter.

“Right now, the US has the biggest advantage of forcing China to negotiate the agreement more than ever,” said Shashwat Das, PCAOB’s chief negotiator on audit oversight with Chinese officials from 2011 to 2015. “The HFCAA has laid the groundwork for the recent discussions between the PCAOB and the Chinese authorities, which are likely to result in a deal this summer,” said Mr. Das, who is now a lawyer at King & Spalding LLP in Washington.

China’s policy of stamping out COVID-19, keeping its international borders closed and throwing mega-cities into lockdown, however, could delay the timeline for on-the-ground inspections by US officials.

Even if a deal goes through that allows US regulators to inspect auditors in China, the PCAOB will have to determine whether China is HFCAA compliant as a jurisdiction, Adequate access to audit papers of companies will be required.

“An agreement without successful execution will not satisfy U.S. law,” PCAOB said in the statement, adding that it “must have the unfettered ability to choose” which auditors and their clients’ audit papers to inspect.

The scope and depth of such inspections was a contentious issue in previous rounds of negotiations. In pilots conducted during 2016, China handed over heavily revised audit papers and blocked PCAOB from accessing the records of the most valuable US-listed Chinese companies, including Alibaba. Chinese officials also appeared in interviews that the PCAOB conducted during the inspection, potentially interfering with the process. Eventually the talks broke down.

There are currently over 250 Chinese companies that are listed on US exchanges. PCAOB is not required to inspect all of its audit papers at an early stage, but should be able to examine a meaningful sample to determine whether China is HFCAA compliant as a jurisdiction.

Overall, it can be a laborious process, even if China makes concessions on areas it previously did not want.

“The clock is ticking, and unless China shows greater resilience than it is today, the removal of some or all of its companies is inevitable,” Willems said.

Write Jing Yang at [email protected] and Paul Kiernan at [email protected]

Credit: www.Businesshala.com /

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