U.S. and China officials must reach an agreement “very soon” over access to audit work papers for Chinese companies to avoid being kicked off American stock exchanges, Securities and Exchange Commission Chair Gary Gensler said Wednesday.
Regulators from the two countries have been locked in negotiations over granting U.S. auditor watchdogs complete and open access to the work papers of about 200 Chinese companies, including Alibaba Group Holding Ltd and JD.com Inc. An American law signed in 2020 could force those companies off the Nasdaq and the New York Stock Exchange as soon as 2024, if inspectors from the Public Company Accounting Oversight Board don’t get access.
“We are not willing to have PCAOB inspectors sent to China and Hong Kong unless there is an agreement on a framework allowing the PCAOB to inspect and investigate audit firms completely,” Gensler said at a Wednesday event hosted by the Center for Audit Quality. The SEC oversees the PCAOB.
China’s quarantine requirements related to the Covid-19 pandemic and other logistics mean an agreement over how the reviews would occur needs to be wrapped up very soon, he said.
U.S. lawmakers were originally considering legislation that would move up the audit compliance deadline to 2023, but ended up not including it in a bill to support U.S. chipmakers that the
“The current storm is gone, but a bigger one could come in 2023,” Jefferies Financial Group Inc. analysts led by Edison Lee wrote in a note Thursday.
China’s securities regulator did not immediately respond to a request for comment on Gensler’s remarks.
The audit-paper inspection requirements for all companies that trade publicly in the U.S. dates back to a 2002 law. Dozens of other countries have permitted the audit inspections, letting American officials interview local accountants and scrutinize the documentation underlying their work.
China and Hong Kong have refused, citing confidentiality laws and national security concerns.
With the clock ticking, some Chinese firms including
Auditor Independence
During the event, Gensler said in a virtual interview with Capitol Account that he’s asked SEC staff, as well as the PCAOB, to determine if rules to prevent conflicts of interest at auditors may need to be updated.
Large accounting firms are under scrutiny for how they ensure that different arms of their business, such as consulting services, don’t influence their auditing units. Ernst & Young is considering splitting off its consulting wing to free up both verticals for growth and to avoid conflicts.
Gensler said auditors needed to remain “vigilant” to ensure their non-auditing businesses don’t compromise their oversight functions.
— With assistance from Lisa Du and Zhang Dingmin
