Tech

Audits of Chinese companies begin with US inspections

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US regulators have begun inspecting China-based audits, kicking off a months-long process that will determine whether companies of

Alibaba

BABA -1.09%

Group Holding Ltd. nasty

Yum China

YUMC -2.94%

Holdings Inc. may remain listed on US stock exchanges.

The inspection, which will last eight to 10 weeks in Hong Kong, would allow the US surveillance watchdog to decide by the end of this year whether China a milestone agreement to give U.S. accounting inspectors full access to the auditing records of New York-listed Chinese companies.

“The time for negotiation is over. The agreement has been signed. And it needs to be followed completely,” Erica Williams, chair of the Public Company Accounting Oversight Board, said Thursday. “Any interference with our ability to retain information when needed is a deal breaker.”

Speaking at the fall conference of the Council of Institutional Investors, Ms Williams said PCAOB teams arrived in Hong Kong last week and will conduct inspections at audit firms in both mainland China and Hong Kong. The inspectors look at audits of selected companies and the quality control systems of the audit firms.

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 reported that earlier.

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.

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All four – along with more than 160 Chinese companies – have been identified as non-compliant with the Holding Foreign Companies Accountable Act, which came into effect last year. If the PCAOB fails to fully inspect accounting firms in China, some 200 Chinese companies worth more than $1.15 trillion could be thrown from US stock exchanges by early 2024.

Officials from the China Securities Regulatory Commission and the Chinese 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.

According to Jackson Johnson, president of Johnson Global Accountancy and former PCAOB inspector, it is common for representatives from both countries to sit in meeting rooms to observe inspection arrangements and ensure inspectors can do their jobs without any interference.

Covid-19 lockdowns, crackdowns on corruption and more have put China’s economy on a potential crash course. Dion Rabouin of WSJ explains how the economic downturn in China could hurt the US and the rest of the world. Illustration: David Fang

Audit firm engagement partners, who oversee the audit work and sign the audit report, will typically be asked about internal controls, revenue recognition principles and external audit policies during the pandemic, Mr Johnson added.

In addition to audit working papers, internal documents, including email exchanges between auditors and their issuer clients, may be examined if the inspectors deem the information necessary, said Salvatore Collemi, founder of Collemi Consulting & Advisory Services LLC, which advises audit firms on audits. quality control.

For years, Chinese authorities have denied US regulators access to the data, citing national security concerns. However, China’s securities regulator said last month that audit working papers generally do not contain state secrets, personal data or other sensitive information.

Some Chinese companies have pursued alternative or primary listings in Hong Kong to hedge the takedown risk. Last month, five Chinese state-owned companies said: they would take their US deposit shares off the stock marketbut they may still be subject to retrospective PCAOB inspections.

Write to Michelle Chan on [email protected]

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