China’s new audit rules don’t answer all of US-listed firms’ prayers, industry watchers say

  • The onus will be on listed companies to assess what is sensitive information, Chamber of Hong Kong Listed Companies CEO says
  • Inevitable that some companies with sensitive information may be more uncertain about listing in the US: CPA Australia executive

New audit review requirements revealed by China’s security watchdog over the weekend have not solved all the problems faced by Chinese companies listed in the United States, industry watchers said on Monday.

Not only did regulators in the US need to agree with the new requirements, but such companies and their auditors will also need clearer guidelines on how to comply with the new rules.

“The onus will be on listed companies to assess what is sensitive information. However, it is a fine line between withholding sensitive information and an incomplete disclosure,” said Mike Wong, CEO of the Chamber of Hong Kong Listed Companies.

The China Securities Regulatory Commission (CSRC) on Saturday issued drafted rules that scrap a requirement that only Chinese regulators can conduct on-site audits of Chinese companies listed overseas. China currently denies access to the US’s Public Company Accounting Oversight Board (PCAOB), citing state secret concerns among others. The new rules also require listed companies and their accountants to decide what is sensitive information and what cannot be handed over to US regulators.

The weekend’s announcement confirmed an earlier South China Morning Post report that the mainland watchdog would adopt a new approach. It also follows the identification last month by the US’s Securities and Exchange Commission (SEC) of 11 New York-listed Chinese companies – out of nearly 200 – as liable to the Holding Foreign Companies Accountable Act (HFCAA), which opens the possibility of their delisting if the PCAOB finds them in non-compliance after three consecutive years. The SEC and PCAOB did not immediately respond to requests for comment.

Listed companies will be under great pressure from both US regulators and shareholders to make sufficient disclosures, while they will also need to follow China’s security requirements, Wong said. To avoid such trouble, companies will avoid listing in the US, he added.

The solution may well be half-baked as some Chinese companies in possession of sensitive information might not be able to fulfil the audit requirements of both countries, said Clement Chan, managing director of accounting firm BDO. But it was a step in the right direction, he added.

Accounting professionals will rely on clear guidelines by Chinese regulators on the audit working papers that may be subjected to inspections by US regulators, said Robert Lui, councillor of CPA Australia’s Greater China Division.

“Industries such as retail, construction or manufacturing should have less sensitive information, while the telecoms industry may own more sensitive information, which may have an impact on the relevant audit documentation,” Lui said. “It is inevitable that some of these companies that have sensitive information may be more uncertain about listing in the US.”

Lui, however, said the CSRC’s announcement was a very positive breakthrough. “It shows China is committed to negotiations, and to finding a solution that can benefit both countries, and to protecting the interests of investors,” he said.

Investors seemed to share this view, with stocks in Hong Kong rising to a five-week high on Monday. The Hang Seng Index climbed 2.1 per cent to 22,502.31 at the close, its highest level since March 1.

“Following this development, we believe the likelihood of delistings has decreased, potentially removing a significant overhang for Chinese companies,” said Mike Shiao, chief investment officer for Asia excluding Japan at US investment firm Invesco. “This positive development could trigger a short-term rebound in the stock prices of ADRs [American depository receipts],” he said in a statement.

Stephen Law, a veteran private equity investor who has helped many companies list in the US over the past two decades, said the whole issue was not a listing issue, but one involving a “political consideration”.

“I started listing companies in the US 20 years ago with similar audit arrangements without any problems,” he said. “At present, it is a compromise from the mainland’s side. I suppose the US has to consider this out of its overall fight with China. This is a political consideration.”

Author: Enoch Yiu, SCMP

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