China Companies Audit

China Companies Audit

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The number of Chinese companies that could be delisted from US exchanges grew by three on Friday as Alibaba was among those added to the list in a long-running dispute over access to Chinese audits of their accounts.

As talks between China and the US continue to seek a deal, American regulators and officials have been intensifying calls for resolution, pushing a message to Beijing that time is running out for both sides to come together.

US regulators have been seeking open access to the Chinese audit working papers of US-listed Chinese companies, which is the paperwork supporting their audited financial statements. Beijing has long fought to stop overseas regulators from inspecting domestic accounting firms, citing security worries.

The clash came to a head in December when the US SEC confirmed rules that would allow for the banning of trading in Chinese companies' shares.

Goldman Sachs estimated in March that US institutional investors owned almost $200 billion worth of American Depositary Receipts in Chinese companies.

Negotiations between American and Chinese regulators have been ongoing for more than a year now, and while China has recently said both sides are committed to reaching an agreement, the US has been more circumspect about finding a resolution.

The SEC has pinpointed over 160 Chinese companies listed in the US as facing delisting risks. Also, starting spring 2024, trading bans will be imposed on companies that fail to comply with audit requests for three consecutive years.

Last week the, US corporate auditing watchdog chair said they would not accept any limitations being placed on access to audit papers for US-listed Chinese firms.

Liu He one of the Vice Premiers of China said in March that discussions between Chinese and US regulators had made progress, and both sides were working on plans to cooperate with a vice chairman of China's securities watchdog saying soon after that he expected a deal to be reached soon.

But for the US, SEC Chair Gensler said just last week he would not allow public accounting inspectors to travel to China or Hong Kong unless China and the US can come to terms on complete audit access.

The US Senate narrowly passed a bill recently to boost the country's ability to compete with China, but some analysts and investors have taken the legislation as giving both countries another year to overcome the impasse, as the final bill eliminated a provision that would have hastened the cutoff date for China to comply with audit requirements from early 2024 to early 2023.

The SEC said the US accounting regulator would need to make on-site inspections in China by November. The watchdog needs to do that to draw a conclusion on whether it can inspect or investigate accounting firms based in mainland China and Hong Kong that are registered with the US regulator.

It is not obvious what the SEC will do after receiving the watchdog's annual assessment for 2022, as after the previous annual assessment, the SEC began pinpointing and listing public companies that will be facing a risk of their trading being suspended.

Meanwhile, there is still a possibility that in the next few months, the US Congress may pick another legislative vehicle to move up the deadline for Beijing to comply with access to audit papers to early 2023.