Chinese stock delisting threat eases as US gets access to audit data
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ABOUT 200 companies based in China and Hong Kong are no longer facing an acute threat of being booted off American stock exchanges, sending shares surging.
The US Public Company Accounting Oversight Board said on Thursday (Dec 15) that its inspectors have been able to sufficiently review audit documents from firms based in the two jurisdictions. The determination diminishes the chances that companies including Alibaba Group Holding and JD.com will be delisted in New York.
The audit watchdog’s announcement doesn’t entirely eliminate the delisting risk that Chinese companies face. The Public Company Accounting Oversight Board (PCAOB) must be able to fully inspect audit work papers in China and Hong Kong for at least three consecutive years before Chinese American Depositary Receipts will be in the clear.
“Today’s announcement is about one question and one question only: Is the PCAOB able to inspect and investigate firms in mainland China and Hong Kong completely at this time. The answer, following thorough and systematic testing, is yes,” PCAOB chair Erica Williams told reporters. The agency would reassess if access ebbed, she added.
China and Hong Kong are the only places that historically haven’t allowed the reviews, with officials citing national-security and confidentiality concerns. The auditor watchdog’s announcement follows a recent high-stakes round of PCAOB inspections in Hong Kong, which represented a major breakthrough in a long-running dispute.
Shares of US-listed China stocks jumped across the board on the news, pushing the Nasdaq Golden Dragon Index up as much as 2.5 per cent just after the open. Large-cap tech companies Alibaba and JD.com rallied as much as 3.5 per cent each, while Pinduoduo rose 3.1 per cent, before they erased gains to track a broad market slump. The Golden Dragon Index closed 2.3 per cent lower, while the Nasdaq 100 Index fell 3.4 per cent.
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“It’s a great first step and an important victory and very significant to show that there are areas where the US and China can have meaningful dialogue in an otherwise very tense environment,” said Sandra Hanna, who leads the securities enforcement practice for Miller & Chevalier. “We need to continue to have a long-term view and monitor progress closely.”
The PCAOB said in a report that its inspectors and investigators were able to view full audit work papers of eight companies audited by KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers in Hong Kong, and retain the information that they needed. The board will release a report on its inspections of each auditing firm in the first half of 2023, Williams said.
The individual companies whose audits were inspected won’t be identified in the reports. PCAOB inspections serve as an audit of the auditor, ensuring they meet basic standards and provide an effective check on corporate accounting.
The agency’s 32 staff sent to Hong Kong found myriad potential deficiencies, but Williams said that the type of lapses and their number are typical for jurisdictions that have never been scrutinised by the PCAOB before. “We look at this as a sign really that our inspection process worked,” she said.
Williams told Bloomberg News that the agency has five ongoing investigations stemming from its work in China. Three were begun before PCAOB staff landed in Hong Kong in September, and two were initiated afterward, she said. “We try to move our investigations as as quickly as we can,” Williams said, adding that “enforcement is one of the best ways that we keep investors protected.”
The PCAOB said in its report that it “has not observed any instances of non-compliance” by the Chinese government with the terms of the inspection agreement between the two countries.
“This is the beginning – not the end – of our work to inspect and investigate completely,” Williams said in an interview Thursday with Bloomberg Markets: The Close.
“We already are making plans to have teams on the ground in 2023 in order to continue our regular inspections there,” she said. “And if China denies our access, if there are any impediments that they put in our way, we will not hesitate to make a determination immediately next year.”
The clash over audits became a political sticking point after the 2020 Holding Foreign Companies Accountable Act said clients of firms whose work papers can’t be inspected face being kicked off the New York Stock Exchange and Nasdaq. The legislation set a three-year time frame for delisting companies. The board’s vote Thursday vacates a 2021 determination that China did not grant access that year, triggering the compliance countdown.
In a separate statement, Securities and Exchange Commission chair Gary Gensler said the new determination “resets the three-year clock for compliance”.
Nevertheless, Chinese companies in the US face heightened disclosure requirements to inform investors of the risks associated with their corporate structure and their ability to pay investor dividends, Gensler said. BLOOMBERG
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