Chinese Companies Submit to US Audit Watchdog Inspection, Avert Delisting Threat for Now

The logo of accounting firm PricewaterhouseCoopers (PwC) is seen on a board at the St. Petersburg International Economic Forum 2017 in St. Petersburg, Russia, on June 1, 2017. (Reuters/Sergei Karpukhin)

The Public Company Accounting Oversight Board (PCAOB), accounting watchdog in the United States, has received full access to inspect and investigate companies operating in China for the first-ever time. The PCAOB is also tasked with overseeing registered public accounting firms worldwide.

The PCAOB had the sole discretion to select which firms to audit, the potential violations it looked into, and also audit engagements without having any input or influence from Chinese authorities. Staff at the accounting watchdog selected two companies for inspection: PricewaterhouseCoopers in Hong Kong and KPMG Huazhen LLP in mainland China. The firms were selected using the same methodology that is usually applied in PCAOB inspections.

Inspectors from the PCAOB were able to view complete audit work papers without any redactions, and the agency was able to retain critical information to finish the work. The PCAOB was also able to interview and take testimony of all individuals linked to the audits which the agency inspected or investigated.

The “historic and unprecedented access” has only been possible due to the Congress passing the Holding Foreign Companies Accountable Act (HFCAA) through which a “clear message” was sent that access to U.S. capital is a “privilege and not a right,” said PCAOB Chair Erica Williams, according to a news release on Dec. 15.

“This is the beginning of our work to inspect and investigate firms in China, not the end. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward,” she said.

“Our teams are already making plans to resume regular inspections in early 2023 and beyond, as well as continuing to pursue investigations.”

Delisting Issues

By granting the PCAOB access to inspect and investigate firms in China, the possibility of roughly 200 Chinese firms getting removed from U.S. stock exchanges has eased.

“This falls into the category of a game-changing view of Chinese companies because the threat of their delisting seems to have been eliminated,” Art Hogan, chief market strategist at B. Riley Financial, said to Reuters.

In 2020, U.S. lawmakers had agreed on legislation that would kick out Chinese companies from American stock exchanges unless they adhere to U.S. auditing standards.

Last year, the PCAOB complained that Chinese authorities prevented the oversight board from inspecting and investigating in China and Hong Kong. In August this year, Washington and Beijing reached a deal to resolve the dispute.

Uncovering Information

Some have raised concerns about the information the audits might uncover. While speaking to Reuters, Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, said that the agreement takes one of the risks “off the table” when it comes to investing in Chinese firms.

However, issues identified due to the more strict accounting oversight “could be very bad for the sector, especially if there is then no effort to correct it or come clean,” he said.

According to the PCAOB release, Williams admitted that the agency staff had identified “numerous potential deficiencies” in their inspection work. The reports are expected to be finalized and published next year.

Calling the deficiencies “troubling,” Williams said that this was not an unexpected development considering that the jurisdiction is being inspected for the first time.

“The fact that we found those potential deficiencies is a sign that the inspection process worked as it is supposed to,” he said.

“This is exactly why Congress passed the HFCAA in the first place—so we could open up the books, identify potential problems, and begin the work of holding firms accountable to fix them. And that is exactly what we intend to do.”

Williams added that the PCAOB’s agreement with Beijing should not be misconstrued as a “clean bill of health” for firms in mainland China and Hong Kong.