EXPLAINER: What to watch out for as talks on US-China audit deal drag on

HONG KONG – The list of Chinese companies facing delisting risks in New York in a long-running dispute over Chinese audits of their accounts continues to expand with the addition of three more on Friday, August 5, after e-commerce giant Alibaba‘s July inclusion.

As talks between Beijing and Washington in search of a resolution drag on, US regulators and politicians have been ratcheting up calls for a resolution, hammering out a message to China that time is running out for both sides to strike a deal.

Here’s what you need to know about the deal talks so far, and what to watch out for in the coming months.

What is the dispute about?

US regulators have been demanding complete access to the audit working papers of New York-listed Chinese companies, essentially documents put together during the auditing of financial statements. Authorities in China have long been reluctant to let overseas regulators inspect domestic accounting firms, citing security concerns.

The spat came to a head in December when the US Securities and Exchange Commission (SEC) finalized rules that enable the prohibition of trading in Chinese companies’ shares.

Goldman Sachs estimated in March that US institutional investors held around $200 billion of American Depositary Receipts (ADRs) in Chinese firms.

What has happened so far?

Regulators from the United States and China have been in negotiations for a deal since last year. While Beijing has in recent months said both sides are committed to reaching a deal, Washington has been more cautious on the outlook.

By Sunday, August 7, the SEC identified 162 Chinese firms listed in New York as facing delisting risks. Trading prohibition will be imposed on a company if it fails to comply with audit working papers requests for three consecutive years, starting from spring, 2024.

Last week, the chair of the US corporate auditing watchdog said it would not accept any restrictions on its access to the audit papers for New York-listed Chinese companies.

How are talks going?

In March, China’s Vice Premier Liu He said talks between Chinese and US regulators had made progress, and both sides were working on specific cooperation plans. A vice chairman of China’s securities watchdog in April said he expected a deal “soon.”

But on the US side, SEC Chair Gary Gensler said last week he would not send public accounting inspectors to China or Hong Kong unless Washington and Beijing can agree on complete audit access.

The US Senate passed a narrow bill aimed at boosting the country’s ability to compete with China last week. Some analysts and investors have interpreted the legislation as giving both sides another year to resolve the audit impasse: The finalized bill removed a provision that would have accelerated the deadline for China to meet audit requirements from early 2024 to early 2023.

What’s next?

The SEC earlier said the US accounting regulator will have to complete on-site inspections and investigations in China by early November. The watchdog needs to do that in order to draw a conclusion on whether it is able to inspect or investigate accounting firms headquartered in mainland China and in Hong Kong registered with the US regulator.

It is not immediately clear what the SEC will do after receiving the watchdog’s annual assessment for 2022. It was after the 2021 annual assessment that the SEC started identifying public companies facing trading suspension risks.

Meanwhile, there is still a chance that in the coming months the US Congress may choose another legislative vehicle to move up the deadline for China to comply with access to audit papers to the spring of 2023. – Rappler.com