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US, China Reach Agreement on Auditing China-Based Business Accounts


FILE - Traders work on the trading floor at the New York Stock Exchange in New York City, Dec. 28, 2021.
FILE - Traders work on the trading floor at the New York Stock Exchange in New York City, Dec. 28, 2021.

The United States and China announced an agreement Friday to allow U.S. regulators access to China-based accounts — a key first step in a process that could prevent about 200 Chinese companies from being kicked off U.S. stock exchanges.

The agreement is a breakthrough in a longstanding dispute with China. For more than 10 years, Beijing has not allowed foreign regulators to inspect Chinese company audits, citing a desire to protect state secrets.

In a statement Friday, the U.S. auditor watchdog agency, the Public Company Accounting Oversight Board, or PCAOB, said its officials had signed a Statement of Protocol. The agreement they signed — along with the China Securities Regulatory Commission, or CSRC, and China’s finance ministry — will allow full access to inspect and investigate registered public accounting firms based in mainland China and Hong Kong “completely, consistent with U.S law.”

The PCAOB’s statement said under the agreement, it has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates — without consultation or input from Chinese authorities.

They said procedures have been put in place for the board’s inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed. The board also can interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.

The board said it is prepared to have its inspectors on the ground in mainland China and Hong Kong to begin audits by the middle of next month.

In the statement, PCAOB Chairwoman Erica Y. Williams cautioned that while the deal is groundbreaking, it is only a first step. She said that “the real test will be whether the words agreed to on paper translate into complete access in practice.”

Williams noted that whether the PCAOB teams are able to complete their work without obstruction will inform the PCAOB’s determinations at the end of this year.

The PCAOB inspects and investigates registered public accounting firms in more than 50 jurisdictions around the world, as mandated by Congress. But for more than 10 years, China obstructed the board’s access to inspect public accounting firms in mainland China and Hong Kong.

The U.S. Congress in 2020 passed a law — The Holding Foreign Companies Accountable Act — requiring all companies listed on the U.S. stock exchange to submit to PCAOB inspections or face delisting from the exchanges by the U.S. Securities and Exchange Commission. That prompted negotiations between the U.S. and China.

Some information for this report was provided by Reuters.

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