China sends regulators to Hong Kong to assist U.S. audit inspection -sources

GDS Holdings

22/09/2022 19:48

(Adds PCAOB comment)
    By Xie Yu, Julie Zhu and Selena  Li
       HONG KONG, Sept 22 (Reuters) - Beijing has sent a team
of regulatory officials to Hong Kong to assist the U.S. audit
watchdog with onsite audit inspections involving Chinese
companies, four people familiar with the matter said, as part of
a landmark deal between the two countries.
        A China-U.S. agreement last month allows U.S.
regulators, for the first time, to inspect China-based
accounting firms that audit New York-listed companies, a major
step towards resolving an audit dispute that threatened to boot
more than 200 Chinese companies from U.S. exchanges.
 urn:newsml:reuters.com:*:nL1N3020TN
    About 10 officials from the China Securities Regulatory
Commission (CSRC) and the Ministry of Finance (MOF) have arrived
in Hong Kong and joined the audit inspection, which started on
Monday, three of the people said.
        The officials will assist a team of inspectors from the
Public Company Accounting Oversight Board (PCAOB), the U.S.
audit watchdog, who are in Hong Kong for the onsite inspection,
the four people said.
    All of the sources declined to be named due to the
sensitivity of the matter.
    Representatives at CSRC and MOF did not immediately respond
to Reuters requests for comment. 
    A spokesperson for the PCAOB declined to comment on
Thursday. However, in a speech on Thursday, PCAOB chair Erica
Williams said agency officials had arrived in Hong Kong to begin
the inspections. 
        “The PCAOB has sole discretion to select the firms,
audit engagements and potential violations it inspects and
investigates – without consultation with, nor input from,
Chinese authorities,” she said.
  
        As with all inspections, they will look at factors,
including the audits of the selected companies and the overall
quality control systems of the audit companies.
  
        The gathering of U.S. and Chinese officials together in
Hong Kong marks a major step forward in what was expected to be
a fraught process implementing the audit deal, the most detailed
agreement the PCAOB has ever reached with China.
    State-owned China Southern Airlines  ZNH.N  and data centre
company GDS Holdings  GDS.O  are among the U.S.-listed Chinese
companies for audit inspection in the Asian financial hub, two
separate sources said.
    China Southern Airlines and GDS did not respond to requests
for comment.
    Reuters reported last month that U.S. regulators had picked
a number of U.S.-listed Chinese companies including e-commerce
majors Alibaba Group Holding Ltd  BABA.N   9988.HK  and JD.com
Inc  JD.O   9618.HK  for audit inspection.  urn:newsml:reuters.com:*:nL1N306129
    FULL ACCESS
        Officials from the CSRC, which has been leading
negotiations with U.S. authorities to resolve the audit dispute,
are expected to be present when the PCAOB conducts interviews
with and takes testimony from the audit firms' staff, one of the
four people familiar with the audit process said. 
        The whole inspection process will last about eight to 10
weeks, said two of the four sources, in line with comments by
U.S. Securities and Exchange Commission (SEC) Chairman Gary
Gensler in a meeting with lawmakers last week. Williams said on
Thursday, however, that the timeline ultimately depended on
China’s level of cooperation.
    It was not clear whether the Chinese officials would be
present for every step of the inspection process with PCAOB
representatives.
    A separate source familiar with the matter said that
involvement by the Chinese regulators was consistent with the
way the PCAOB conducts inspections elsewhere around the world
and that the U.S. watchdog was not giving China any special
consideration. 
    U.S. regulators have for more than a decade demanded access
to audit papers of U.S.-listed Chinese companies, but Beijing
has been reluctant to let U.S. regulators inspect its accounting
firms, citing national security concerns.
    Despite the audit deal, legal experts and China watchers
last month warned they could still clash over how it is
interpreted and implemented, with the U.S. side seeking full
access to Chinese audit papers without any consultation or input
from Chinese regulators.  urn:newsml:reuters.com:*:nL4N3023FG
    Beijing's statement on the deal last month, however,
emphasized that the U.S. watchdog will have to obtain documents
through the Chinese regulators, and must involve the China side
during interviews and testimony taking. 
    The onsite inspections by the PCAOB are being conducted in
the Hong Kong offices of the selected Chinese companies' audit
firms, said two of the sources.
    The PCAOB will spend the first week inspecting the auditors'
compliance and internal control systems and move to review the
audit working papers of selected companies from the second week,
they added.
    In line with the U.S. regulators' statements, the PCAOB
inspectors can see complete audit work papers without any
redactions, and they will adopt view-only procedures for
personally identifiable information, the two sources said.
 (Reporting by Xie Yu, Julie Zhu, Selena Li in Hong Kong and
Michelle Price in Washington; Editing by Sumeet Chatterjee and
Edmund Klamann)
 ((Yu.Xie@thomsonreuters.com;))