(Bloomberg) -- Beijing and Washington have reached a preliminary deal to allow American officials to review audit documents of Chinese businesses that trade in the US, a first step toward avoiding the delisting of about 200 firms from New York exchanges.
US shares from Chinese companies rose Friday in the immediate aftermath of the deal, which will allow Public Company Accounting Oversight Board inspectors to access audit work papers and personnel. American officials plan to be on the ground in Hong Kong by mid-September to start the reviews.
The agreement marks a major breakthrough in a decades-long standoff between the two superpowers over access to audit documents. The long-simmering accounting dispute became a political sticking point after a US law in 2020 said firms whose work papers can’t be inspected face being kicked off American stock exchanges.
China and Hong Kong are the lone two jurisdictions worldwide that haven’t allowed the PCAOB inspections, with officials there citing national security and confidentiality concerns. The agreement announced on Friday represents a rare compromise on the issue from Beijing, which has repeatedly vowed to bolster market confidence while balancing national security concerns with the needs of businesses.
“We have this unprecedented arrangement signed this morning, but we still need to see over the next several months whether there will be compliance,” Securities and Exchange Commission Chair Gary Gensler said in an interview on “Surveillance” on Bloomberg Television. He said the deal was more comprehensive than that with any other country, and that American officials would be able to assess by December whether they were getting sufficient access.
The auditing watchdog agency didn’t make any compromises with China in its negotiations, PCAOB Chair Erica Williams said Friday during an interview with Bloomberg Television’s “Balance of Power.”
“There are no special arrangements with China. We are not providing them anything we don’t provide” other countries around the world, she said.
US officials stressed that the agreement was just a first step. The PCAOB will need to get a large number of its inspectors on the ground and audit checks on selected firms could take months.
Separately, the China Securities Regulatory Commission said delistings can be avoided if follow-up cooperation can satisfy both sides. In a statement, the CSRC called the agreement a major step and said it established clear rules for handling sensitive information.
Shares of large-cap Chinese technology giants initially surged in US trading before paring gains as part of a broader market rout following hawkish comments by Federal Reserve Chair Jerome Powell. Alibaba (NYSE:BABA) Group Holding Ltd. rose as much as 5%, while JD (NASDAQ:JD).com Inc. added as much as 4.6% and Pinduoduo (NASDAQ:PDD) Inc. jumped more than 6%, but all three were trading lower by early afternoon in New York. The Nasdaq Golden Dragon China Index was up 0.4% at 12:40 p.m.
Talks between Beijing and Washington on the issue gathered pace after state-owned companies including China Life Insurance Co., PetroChina Co. and China Petroleum (NYSE:SNP) & Chemical Corp. said on Aug. 12 that they planned to delist from US exchanges. Meanwhile, firms such as Alibaba are seeking primary listings in Hong Kong.
In a press briefing, the PCAOB said inspectors were preparing to deploy to Hong Kong to begin reviews. The city was chosen because of easier quarantine protocols related to Covid-19, officials said. The watchdog’s staff told reporters that the agreement allows for full and complete access to the audit work papers of companies in both mainland China and Hong Kong.
The PCAOB added that it will get access to unredacted documents under the deal. More sensitive materials would be available to American inspectors on a “view only” basis, the regulator said.
While the 2020 US law set a timeframe for booting companies from American markets for non-compliance, the requirement that all public companies submit to PCAOB inspections of their audits was included in the 2002 Sarbanes-Oxley Act. That legislation was passed in the wake of the Enron Corp. accounting scandal and it’s meant to prevent fraud and wrongdoing that could wipe out shareholders.
(Updates with comment from PCAOB Chair Williams in paragraphs 6-7.)
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