Exclusive: China sends regulators to Hong Kong to help US audit inspectors – sources

A Chinese national flag flies in front of the China Securities Regulatory Commission (CSRC) building on Financial Street in Beijing, China, July 9, 2021. REUTERS/Tingshu Wang

HONG KONG, Sept 22 (Reuters) – Beijing has sent a team of regulatory officials to Hong Kong to help the U.S. audit watchdog with on-site audits involving Chinese companies, four people familiar with the matter said, as part of a landmark deal between two sides.

A Sino-U.S. agreement last month allows U.S. regulators for the first time to inspect China-based accounting firms that audit New York-listed companies, an important step toward resolving an audit dispute that threatened to drive more than 200 Chinese companies off U.S. exchanges . Read more

About 10 officials from the China Securities Regulatory Commission (CSRC) and the Ministry of Finance (MOF) arrived in Hong Kong and joined the audit inspection that began on Monday, three of the people said.

The officials will assist a team of inspectors from the Public Company Accounting Oversight Board (PCAOB), the US audit office, who are in Hong Kong for an on-site inspection, the four people said.

All the sources declined to be named because of the sensitivity of the matter.

Representatives of the CSRC and the Treasury Department did not immediately respond to Reuters requests for comment.

A PCAOB spokesman declined to comment Thursday. However, in a speech on Thursday, PCAOB Chair Erica Williams said agency officials had arrived in Hong Kong to begin inspections.

“The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates — without consultation with or input from the Chinese authorities,” she said.

As with all inspections, they will look at factors including the audits of the selected companies and the audit companies’ overall quality control systems.

Bringing U.S. and Chinese officials together in Hong Kong marks a major step forward in what was expected to be a difficult process to implement the audit deal, the most detailed agreement the PCAOB has ever reached with China.

State-owned China Southern Airlines and data center company GDS Holdings are among the US-listed Chinese companies under audit in the Asian financial hub, two separate sources said.

China Southern Airlines and GDS did not respond to requests for comment.

Reuters reported last month that U.S. regulators had singled out a number of U.S.-listed Chinese companies for audit, including e-commerce majors Alibaba Group Holding Ltd ( 9988.HK ) and JD.com Inc ( 9618.HK ). Read more

FULL ACCESS

Officials from the CSRC, which is leading negotiations with U.S. authorities to resolve the audit dispute, are expected to be present when the PCAOB conducts interviews and takes testimony from staff at the audit firms, one of four people familiar with the audit process said.

The entire review process will take about eight to 10 weeks, two of the four sources said, in line with comments by US Securities and Exchange Commission (SEC) Chairman Gary Gensler at a meeting with lawmakers last week. Williams said Thursday, however, that the timeline ultimately depends on China’s level of cooperation.

It was unclear whether Chinese officials would be present at every step of the review process with PCAOB representatives.

A separate source familiar with the matter said the involvement of Chinese regulators is consistent with the way the PCAOB conducts inspections elsewhere in the world and that the US watchdog does not pay special attention to China.

US regulators have demanded access to audit documents of US-listed Chinese companies for more than a decade, but Beijing has been reluctant to allow US regulators to inspect its accounting firms, citing national security concerns.

Despite the audit deal, legal experts and China observers warned last month that they could still clash over how it is interpreted and implemented, with the US seeking full access to Chinese audit documents without consultation or input from Chinese regulators. Read more

However, Beijing’s statement on the deal last month stressed that the US watchdog would have to obtain documents through Chinese regulators and must include the Chinese side during interviews and taking testimony.

The on-site inspections by the PCAOB are being conducted at the offices of Hong Kong audit firms of selected Chinese companies, two of the sources said.

The PCAOB will spend the first week inspecting auditors’ compliance and internal control systems and will move to reviewing audit working papers of selected companies from the second week, they added.

In line with statements from U.S. regulators, PCAOB inspectors can see the full audit working papers without any redactions and will adopt procedures only to review personally identifiable information, two of the sources said.

Reporting by Xie Yu, Julie Zhu, Selena Li in Hong Kong and Michelle Price in Washington; Editing by Sumeet Chatterjee and Edmund Klamann

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