U.S. and China Announce Deal to Share Audits of U.S.-Listed Chinese Firms

The agreement could prevent Chinese companies from having to depart U.S. stock exchanges, but U.S. officials remain wary of whether China will fulfill its terms.

This article is part of our Daily Business Briefing

China-based Tencent Music Entertainment listed on the New York Stock Exchange in 2018.
Credit...Bryan Smith/Reuters

Ana Swanson and

Ana Swanson reported this article from Washington, and Keith Bradsher from Hong Kong.

American and Chinese officials said Friday that they had reached an agreement to allow accounting firms in China to share more information with American regulators about the finances of Chinese companies listed on U.S. stock exchanges.

The agreement is a potentially big step toward resolving a conflict that had appeared likely to force some of China’s largest companies to leave American stock exchanges starting in 2024.

Wall Street leaders have been strongly opposed to removing China-based companies, which account for $1.3 trillion of market value. The exclusion of big Chinese companies like Alibaba, Baidu and Yum China from the United States, which has the world’s largest markets for attracting global investment, also would have been a significant setback for China.

The long-running dispute stems from rules put in place in the United States after the 2001 Enron accounting scandal to allow regulators to scrutinize the work of the firms that sign off on the finances of publicly listed companies all over the world. While the United States and China agreed in 2013 on how to enforce the auditing oversight law, Chinese regulators never allowed U.S. authorities full access, citing national security concerns. Then in 2020, Congress passed legislation requiring that companies be removed from public trading lists if regulators could not have access to their full financial information over three years.

The new agreement appears to reflect recent concerns of officials in Beijing, who are struggling to manage a sharply slowing economy as the country’s real estate market falters and consumers curtail spending in response to lockdowns and other measures taken to stop the spread of Covid-19. Those worries may have resulted in a new willingness by Chinese leaders to compromise on sharing more financial information about their companies, despite abiding concerns that China’s national security not be undermined by providing too much information to the United States.

More than 200 Chinese companies are listed on American stock exchanges, and more than 30 accounting firms in China are registered with the Public Company Accounting Oversight Board in the United States, a nonprofit set up by Congress to oversee audits of companies that sell stock to the public.

But Beijing has barred accounting firms from sharing certain financial information with the oversight board. U.S. regulators view China’s national security rationale with skepticism, saying they are able to inspect registered firms in more than 50 other countries. As tensions between the United States and China over trade and geopolitics have risen in recent years, some Chinese companies have voluntarily removed themselves from market listings in the United States, choosing to raise capital in Hong Kong or mainland China instead.

The agreement announced on Friday followed laborious negotiations over how accounting firms would share the details of their audits with American regulators. Still, American officials remained wary about whether the agreement would resolve the two countries’ many differences over whether China has provided adequate access to audits of its companies.

Erica Y. Williams, the chair of the Public Company Accounting Oversight Board, said in a statement that her organization had signed an agreement with the China Securities Regulatory Commission and China’s Ministry of Finance that would be “the first step toward opening access” to inspect and investigate public accounting firms that were registered in mainland China and Hong Kong. She said she had directed her team to prepare to begin on-the-ground inspections in Hong Kong by mid-September and finish an assessment of China’s compliance by the end of the year.

On paper, the agreement would give U.S. officials complete access to audit work papers, audit personnel and other information, with no loopholes or exceptions, Ms. Williams said. However, she added, “now we will find out whether those promises hold up.”

A U.S. government official, who was not authorized to speak to reporters by name, said that inspections would begin in Hong Kong because of protocols related to the coronavirus, but that the agreement also gave the United States the ability to carry out inspections in mainland China.

Documents released Friday by the China Securities Regulatory Commission emphasized that more audit information would be shared in Hong Kong. Mainland China regained sovereignty over Hong Kong from Britain in 1997, and has greatly tightened control over the territory in the past two years after the imposition of stringent national security legislation and the detention of many democracy advocates.

Statements from the China regulatory commission were cautiously optimistic that the pact would allow Chinese companies to continue to be traded on American exchanges.

“We look forward to actively promoting cooperation with the U.S. regulatory authorities in a professional and pragmatic manner and working together to achieve positive results,” the commission stated.

Lynn Martin, the president of the New York Stock Exchange, called the agreement “an important development for the global economy and our U.S. capital markets, which remain pre-eminent largely because of their ability to balance investor protections and access to the world’s leading companies.”

U.S. law requires any company whose finances remain inaccessible to American auditors to delist after three years, but many lawmakers support even tougher rules. Both chambers of Congress have separately approved provisions that would change that timeline to two years — meaning that major Chinese companies could face a trading prohibition beginning in 2023 — though that change has not been passed into law.

Companies listed in the United States must also attest that they are not owned or controlled by a foreign entity.