US Audit Watchdog Insists on Full Access in China-Delisting Case

(Bloomberg) — The US’s top auditor watchdog is throwing cold water on a workaround that’s been floated as a way to avoid the delisting of nearly 200 Chinese companies from American stock exchanges.

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A company’s decision to leave the New York Stock Exchange or Nasdaq voluntarily might not keep the Public Company Accounting Oversight Board from demanding to review its audit work papers, PCAOB Chair Erica Williams said on Monday.

“We need to have complete access,” she said in an interview Monday at Bloomberg’s Washington office. “No loopholes, no exceptions,” Williams added.

China and Hong Kong are the lone two jurisdictions worldwide that don’t allow the PCAOB inspections, with officials there claiming national security and confidentiality concerns. The clock is ticking to avoid a congressionally imposed deadline of 2024 for kicking off businesses that don’t comply.

As US and Chinese officials try to reach a deal, speculation has been mounting that a solution could involve companies that Beijing deems sensitive voluntarily exiting US markets. However, Williams said Monday that the PCAOB’s authority to inspect was retrospective, meaning the watchdog could still demand work papers from those companies even after they leave.

“If a firm or issuer decides to delist this year, it really doesn’t matter to me because I need to know if you engaged in fraud last year,” Williams said, not referring to any company specifically.

The US and China have been at odds for two decades over the legal requirement, which is meant to protect investors from accounting frauds and other financial malfeasance. The 2024 deadline stems from a 2020 law called the Holding Foreign Companies Accountable Act that was popular with both Democrats and Republicans.

Williams declined to say Monday how far back PCAOB inspectors would want to look, noting that the 2020 law doesn’t place a time limit on its authority. “Timing is also not an exception that we are willing to discuss” in reaching a deal with the Chinese, she said.

Alibaba Group Holding Ltd. said last week it was seeking primary listings in Hong Kong, joining Bilibili Inc. and Zai Lab Ltd. which made the move earlier. The switch could help companies tap more Chinese investors while providing a template for other US-listed Chinese firms that face delisting should Washington and Beijing fail to settle audit disputes.

Alibaba said in a Monday corporate filing that it would try to maintain its listing on the New York Stock Exchange and Hong Kong Stock Exchange.

The US Securities and Exchange Commission on July 29 added Alibaba to a growing list of companies that could be kicked off American exchanges if the two countries fail to reach a deal. Congress is considering legislation that could speed up that process to as soon as 2023, adding further pressure for the two sides to quickly reach a deal.

Meanwhile, some companies have switched from Chinese- to US-based auditors in a bid to avoid the delisting threat. However, Williams said that’s not sufficient, adding that the PCAOB decides if China and Hong Kong are complying as entire jurisdictions, rather than basing its determinations on individual firms.

“Whether or not you’re going to be audited by a firm in China or a firm in the US, we have to have complete access” to audit papers, she said.

The PCAOB chair declined to provide a definitive date by which an agreement with Chinese authorities must be reached, but reiterated it would need to be soon. The regulators’ staff, which includes Mandarin speakers, is ready to use all of its resources to conduct the inspections if they do take place, Williams said.

“We have teams ready to go” if an an agreement is reached, Williams added in a Monday interview on Bloomberg Television’s “Balance of Power With David Westin.” “Time is of the essence because this agreement is just the first step,” she said.

(Updates with comments from PCAOB chair throughout.)