China Regulator Weighs Letting U.S. Inspect Some Company Audits

  • Stocks regulator could open less sensitive companies to audit
  • More than 200 U.S.-traded Chinese firms face forced delisting

China’s securities watchdog is weighing a proposal that would allow U.S. regulators to inspect auditors’ working papers for some companies as soon as this year, people familiar with the matter said, in a bid to prevent Chinese firms from being forced to delist en masse from U.S. exchanges.

The China Securities Regulatory Commission is considering allowing U.S. officials to inspect documents on firms that don’t possess sensitive data, the people said, asking not to be identified as the information is private. Companies such as quick service restaurant operator Yum China Holdings Inc. could be examples of those that the provision would apply to, the people said. Travel platform Group Ltd. is another potential example, one of the people said.

Despite the offer, the CSRC would still seek to retain some ability to withhold sensitive data from inspection by the U.S.’s Public Company Accounting Oversight Board, the people said. U.S. officials have previously insisted that inspectors need access to unredacted audit papers.

Deliberations are ongoing and Chinese regulators could decide not to extend the proposal, the people said. The proposal was first reported by the Financial Times.

Representatives for CSRC and Yum China didn’t immediately respond to requests for comment, while a representative for declined to comment.

A PCAOB representative said that the board remains interested in a relationship with Chinese authorities, and this must begin with core principles such as access to audit firm personnel, testimony and other information or documents deemed relevant, including audit work papers free from redactions.

Regulators in China are battling on two fronts. They’re working to rein in what Beijing sees as unacceptable security risks derived from the reckless expansion of capital in overseas markets, while also trying to mollify U.S. officials’ concern about opaque ownership structures and, more recently, steep crackdown-driven losses.

Regulator Needs Flexibility

China has suggested fresh approaches in the past, though they have gained little traction in negotiations.

In 2020, Beijing put forward offers of joint inspections that would allow the PCAOB to pick any of its state-owned companies, and separately, an initiative to jointly examine private-sector firms. Both offers would have involved some information redacted because of national security concerns.

The PCAOB’s then-chairman characterized the CSRC’s proposals as “materially deficient.” The Holding Foreign Companies Accountable Act would help level the playing field for all issuers in the U.S. stock market, U.S. Securities and Exchange Commission officials said ahead of the bill’s signing in December 2020.

Both the PCAOB and the CSRC issued statements last week affirming they are talking about the issue, after the SEC published a provisional list of issuers facing a ban under the act. The SEC declined to comment.

China supports overseas listing and has achieved positive progress in discussions with Washington over Chinese stocks listed in U.S. markets, according to a state media report on Wednesday citing a meeting chaired by Vice Premier Liu He, adding that both sides are working to formulate a detailed cooperation plan.

Companies identified by the SEC, a group which includes Yum China and four other U.S.-traded Chinese firms, will be forced to give up their listings if they can’t bring themselves back in compliance. The law is expected to apply to nearly 200 companies in total.

Source: Bloomberg

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