US regulators have begun inspecting China-based audits, beginning a month-long process that will determine whether Alibaba BABA -1.09% Group Holding Ltd. until Yum China YUMC -2.94% Holdings Inc. can remain listed on American stock exchanges.
The inspection, which is expected to last eight to 10 weeks in Hong Kong, would allow the US audit regulator to decide by the end of this year whether China is honoring a landmark agreement to give US auditors full access to audit working papers of New York-listed Chinese companies .
“The time for negotiations is over. The agreement has been signed. And it must be fully followed,” Erica Williams, chair of the Public Company Accounting Oversight Board, said Thursday. “Any interference with our ability to retain information as needed is a deal breaker.”
Speaking at the Council of Institutional Investors fall conference, Ms Williams said the PCAOB teams arrived in Hong Kong last week and are conducting inspections at accounting firms in both mainland China and Hong Kong. The inspectors will examine audits of selected companies and the quality control systems of the auditing companies.
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The PCAOB is expected to review the audits of some of the most valuable Chinese companies listed in the US, including Alibaba, Yum China, NetEase Inc. and JD.com Inc., The Wall Street Journal previously reported.
The Hong Kong unit of PricewaterhouseCoopers and the China-based units of KPMG, PwC and Deloitte are their respective accounting firms, according to PCAOB records.
All four – along with more than 160 Chinese companies – have been identified as non-compliant under the Holding Foreign Companies Accountable Act, which went into effect last year. Should the PCAOB not fully scrutinize audit firms in China, some 200 Chinese companies valued at more than $1.15 trillion would be booted from U.S. stock exchanges beginning in early 2024.
Officials from China’s Securities Regulatory Commission and China’s Ministry of Finance are also on site to coordinate and assist the inspection, according to people familiar with the matter. The PCAOB declined to comment on the inspections.
It is customary for representatives from both countries to sit in conference rooms to observe inspection arrangements and ensure inspectors can carry out their work undisturbed, said Jackson Johnson, president of Johnson Global Accountancy and a former PCAOB inspector.
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Audit firm engagement partners who oversee the audit work and sign off the audit report are typically asked about the firm’s internal controls, revenue recognition policies and remote auditing policies during the pandemic, Mr Johnson added.
In addition to audit working papers, internal documents, including email exchanges between auditors and their issuers, could be subject to scrutiny if inspectors deem the information necessary, said Salvatore Collemi, founder of Collemi Consulting & Advisory Services LLC, the accounting firm during testing advises quality control.
For years, Chinese authorities denied US regulators access to the records, citing national security concerns. However, China’s securities regulator said last month that audit work papers generally do not contain state secrets, personal information or other sensitive information.
Some Chinese companies have sought alternative or primary listings in Hong Kong to hedge delisting risk. Last month, five Chinese state-owned companies announced they were delisting their US depository shares, but they could still be subject to PCAOB retrospective inspections.
Write to Michelle Chan at [email protected]
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