US regulators gain access to audits of Chinese companies

US regulators on Thursday said they had been allowed to inspect the work of auditors in China for the first time, easing the threat that about 200 Chinese companies could be thrown off the US stock market.

The announcement represents a significant breakthrough after a more than decade-long stand-off between Beijing and Washington, which has argued shoddy audit work contributed to a series of accounting frauds at US-listed Chinese companies.

Companies such as Alibaba, JD.com and Baidu were on course to be delisted starting in 2024 under US legislation that bans trading in stocks whose auditors cannot be inspected by the Public Company Accounting Oversight Board.

China agreed in August to let the PCAOB examine work papers from Chinese auditors, including the local affiliates of the Big Four global accounting firms, but the agency had signalled that it was sceptical it would receive unfettered access. The PCAOB was set up to inspect all the accounting firms that audit US-listed companies, regardless of where they are based.

“The proof was indeed in the pudding, at least in 2022,” said Gary Gensler, chair of the US Securities and Exchange Commission, which oversees the PCAOB.

Erica Williams, PCAOB chair, said: “This is the beginning of our work, not the end. This should not be misconstrued as a clean bill of health for firms in mainland China and Hong Kong.”

Inspectors had found “numerous” potential deficiencies in the audit work in China, Williams said, because firms have not previously been held to US standards. Some could warrant enforcement action, she added.

Although inspectors have not yet been allowed into mainland China, a team spent nine weeks in Hong Kong examining audits conducted by the mainland affiliate of KPMG and the local affiliate of PwC. The audits inspected included those of state-owned enterprises and companies in other sensitive industries, the PCAOB said.

Beijing had resisted US audit inspectors for years over fears they would gain access to sensitive data. In the run-up to the August deal with the PCAOB, several state-owned companies, including the oil producers PetroChina and Sinopec, abandoned their US listings.

The PCAOB said Chinese authorities allowed access to all documentation without withholding or redacting any information and documents were able to be transferred to the US.

If Beijing starts to interfere with inspections in the future, the agency would move to immediately restore the delisting threat, Williams said. Companies cannot be traded in the US if their auditors cannot be inspected for three years in a row.

“Our teams are already making plans to continue inspections in 2023 and beyond,” Williams added.

Several large Chinese stocks that had been under the threat of delisting jumped at the stock market open in New York, although the gains did not last amid a broad market sell-off. The Golden Dragon index fund of Chinese stocks was down 2.5 per cent in lunchtime trading, on par with a 2.5 per cent fall in the S&P 500.

Additional reporting by Jennifer Hughes in New York