US regulators will begin a fresh round of inspections of Chinese companies’ auditors in Hong Kong next week, sources said on Thursday.
The inspections by the US audit watchdog Public Company Accounting Oversight Board (PCAOB) are part of a deal with Beijing to prevent the delistings of Chinese firms from the New York Stock Exchange.
The PCAOB has picked branches of EY, Deloitte, PricewaterhouseCoopers and some other audit firms in both Hong Kong and mainland China for the upcoming inspection, one of the sources said.
The China Securities Regulatory Commission (CSRC) and the Ministry of Finance (MOF) will dispatch a group of Chinese officials to assist the inspection in Hong Kong, a second source said.
Authorities in China have long been reluctant to let overseas regulators inspect local accounting firms, citing national security concerns. However, the US and China reached a landmark deal in August last year to settle a long-running dispute over auditing compliance of US-listed Chinese firms.
The development removed the immediate risk that around 200 Chinese companies, including Alibaba, could be delisted from US stock exchanges.
US regulators spent weeks reviewing auditors’ work in Hong Kong last year after obtaining full access to inspect and investigate New York-listed Chinese companies for the first time ever.
For the upcoming reviews officials from both sides will follow a protocol similar to last year’s onsite inspection, said the sources who were not authorised to speak to media and declined to be identified.
US regulators have said they plan to resume regular inspections and investigations in China in early 2023 and beyond. Any obstruction of inspection access could affect Chinese firms’ listings in the US, they have warned.
Under the PCAOB’s inspection guidelines, in general, each auditing firm is subject to inspection either annually, if the firm provides audit opinions for more than 100 issuers, or otherwise once every three years, said Jessica Zhou, partner at law firm White & Case, based in Hong Kong.
“In light of the PCAOB’s recent, successful completion of its inspections of selected firms in Hong Kong, there is reason to be optimistic that the additional inspections will similarly be carried out in accordance with the agreement,” she said, referring to the deal reached last year.
The PCAOB picked a mainland branch under KPMG and a Hong Kong branch under PwC in last year’s inspections. The regulator said its staff identified “numerous potential deficiencies” in their inspection work at the time.
Inspection reports will be finalised and made public this year, the regulator said earlier.
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