US and China develop framework for inspection of 200 US-listed companies under threat of delisting
The Public Company Accounting Oversight Board (PCAOB) has struck an agreement with Chinese regulatory authorities that would allow the inspection of audit reports for US-listed Chinese companies. Now, according to SEC chair Gary Gensler, “The proof will be in the pudding.”
Roughly 200 Chinese companies — including biopharma companies BeiGene, Hutchmed, Zai Lab, I-Mab, Sinovac, Gracell Biotechnologies, Adagene and Burning Rock Biotech — have been singled out by the SEC for violating a new law governing US-listed companies. The law, called the Holding Foreign Companies Accountable Act, stipulates that any foreign companies audited by a firm that the nonprofit PCAOB is unable to review for three consecutive years should be delisted.
Current Chinese laws prevent auditors from handing over those records. But on Friday, Gensler announced “the first time we have received such detailed and specific commitments from China” to allow PCAOB inspections.
While keeping short on the details, Gensler said the companies have agreed that PCAOB inspectors can select any issuer audits for inspection; get direct access to interview or receive testimony from audit firm staffers; transfer information to the SEC; and see complete audit reports without any redactions.
“On this last item, the PCAOB was able to establish view only procedures — as it has done in the past with certain other jurisdictions — for targeted pieces of information (for example, personally identifiable information),” Gensler said in a news release.
The news comes a day after unnamed sources told the Wall Street Journal that the US and China are working out a deal to allow American regulators to review audit reports in Hong Kong.
The China Securities Regulatory Commission (CSRC) touted the framework in a statement issued on Thursday, calling it an “important first step by both sides” to resolve the issue.
“Keeping Chinese companies listed on the U.S. markets is an all-win arrangement that benefits investors, issuers and both countries in general. This understanding forms common ground for both sides to negotiate and reach the agreement,” the CSRC said.
Gensler emphasized that the deal “will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China.” Inspectors will need to be on the ground by mid-September in order to complete their reviews by the end of the year.
“When foreign issuers seek access to U.S. capital markets, they must abide by the same rules regarding auditing as our domestic issuers,” he said. “While important, this framework is merely a step in the process.”