US Audit Office insists on full access to China delisting case

(Bloomberg) — The top U.S. auditor watchdog is throwing cold water on a solution that has been implemented as a way to avoid delisting nearly 200 Chinese companies from U.S. stock exchanges.

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A company’s decision to voluntarily delist from the New York Stock Exchange or Nasdaq may not prevent the Public Company Accounting Oversight Board from requesting a review of the audit’s working papers, PCAOB Chair Erica Williams said Monday.

“We need to have full access,” she said in an interview Monday at Bloomberg’s Washington office. “No loopholes, no exceptions,” Williams added.

China and Hong Kong are the only two jurisdictions worldwide that do not allow PCAOB inspections, with officials there citing national security and privacy concerns. Time is running out to avoid a congressionally imposed 2024 deadline for non-compliant businesses to begin.

As U.S. and Chinese officials try to reach a deal, speculation is mounting that a solution could involve companies Beijing deems sensitive voluntarily withdrawing from U.S. markets. But Williams said Monday that the PCAOB’s authority to inspect was retroactive, meaning the watchdog could request working documents from those companies even after they’ve gone out of business.

“If a company or a publisher decides to delist this year, it doesn’t matter to me, because I need to know if you committed fraud last year,” Williams said, without mentioning any company in particular.

The US and China have been at loggerheads for two decades over the legal requirement, which aims to protect investors from accounting fraud and other financial wrongdoing. The 2024 deadline comes from a 2020 law called the Responsible Reservations Act that was popular with both Democrats and Republicans.

Williams declined to say Monday how far back PCAOB inspectors would like to look, noting that the 2020 law does not put a time limit on its authority. “Time is also not an exception that we are willing to discuss” to reach an agreement with the Chinese, he said.

Alibaba Group Holding Ltd. said last week that it is seeking a primary listing in Hong Kong, joining Bilibili Inc. and Zai Lab Ltd. who made the move earlier. The change could help the companies attract more Chinese investors, while providing a template for other U.S.-listed Chinese companies facing delisting if Washington and Beijing fail to settle regulatory disputes.

Alibaba said in a corporate filing on Monday that it will seek to maintain its listing on the New York Stock Exchange and the Hong Kong Stock Exchange.

The U.S. Securities and Exchange Commission on July 29 added Alibaba to a growing list of companies that could launch on U.S. exchanges if the two countries do not reach a deal. Congress is considering legislation that could speed up that process until 2023, adding further pressure on the two sides to reach a deal quickly.

Meanwhile, some companies have switched from China-based auditors to US-based auditors in an attempt to avoid the threat of delisting. But Williams said that’s not enough, adding that the PCAOB decides whether China and Hong Kong comply as a whole jurisdiction, rather than basing its decisions on individual companies.

“Whether you’re going to be audited by a company in China or a company in the U.S., we need to have full access” to audit documents, he said.

The PCAOB chairman declined to provide a definitive date by which an agreement with Chinese authorities must be reached, but reiterated that it should be done soon. Regulatory staff, which includes Mandarin speakers, are ready to use all their resources to conduct inspections if they occur, Williams said.

“We have teams ready to move forward” if a deal is reached, Williams added in an interview Monday on Bloomberg Television’s “Balance of Power With David Westin.” “Time is of the essence because this agreement is only the first step,” he said.

(Updates with comments from the PCAOB chair throughout.)

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