China Steps Up Talks With U.S. on Opening Its Companies’ Books
A magnifying glass is held over a 50 subject one dollar note sheet in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

China Steps Up Talks With U.S. on Opening Its Companies’ Books

(Bloomberg) -- U.S. and Chinese officials have held discussions on an agreement that would allow the American audit regulator to review the books of Chinese companies listed there, according to people familiar with the matter, tackling a decades-long point of contention.

China’s securities regulator and the U.S.’s audit watchdog have stepped up talks this year on joint inspections of accounting firms overseen by both organizations, said the people, who asked not to be identified because the conversations are private.

The U.S. Public Company Accounting Oversight Board has agreements with more than 20 foreign regulators to conduct such inspections, but negotiations with China have faltered in the past. Critics have argued that the U.S.’s inability to examine audits puts American investors at risk, and the issue has become a focus for some hard-liners in the White House who’ve urged President Donald Trump to take a tough line in trade talks, separate people familiar said earlier.

To date, China hasn’t offered solutions consistent with the PCAOB’s core principles including the ability to regularly conduct inspections and select specific engagements and violations to be examined, as well as access to firm personnel and information deemed relevant, said the watchdog’s chairman, William Duhnke, in response to a request for comment.

Chinese companies with a combined market capitalization of more than $1 trillion are listed on U.S. exchanges, according to Bloomberg data, including technology giants Alibaba Group Holding Ltd. and Baidu Inc. Earlier this year, U.S. lawmakers introduced a bill proposing the de-listing of Chinese firms that don’t open their books to American regulators.

The conflict over public company audits first attracted attention about a decade ago when Chinese companies were accused of acquiring dormant U.S.-listed firms as a way to access markets without the usual regulatory scrutiny. The 2002 Sarbanes-Oxley Act, which created the PCAOB, gives the non-profit corporation the power to inspect any auditor who examines the financial statements of companies that trade in U.S. markets, including overseas audit firms.

Of the 224 companies listed in the U.S. where the PCAOB faces obstacles conducting inspections, 213 have auditors based in mainland China or Hong Kong, according to a 2018 statement by the heads of PCAOB and the U.S. Securities and Exchange Commission. China’s state security laws are at times invoked to limit U.S. regulators’ ability to oversee the financial reporting of China-based companies listed in the U.S., they said.

When asked about the U.S. bill and potential talks, the China Securities Regulatory Commission said this month that “Chinese law does not stipulate that audit and financial details are state secrets.” It said it has provided audit working papers of 23 issuers to overseas regulators under cross-border cooperation frameworks since 2013, including 14 to the U.S. It did not immediately respond to a fax seeking an update on talks.

©2019 Bloomberg L.P.

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