China and the United States are nearing an agreement that would allow Chinese firms to remain listed on U.S. exchanges, marking a significant development in resolving cross-border auditing disputes. The U.S. Public Company Accounting Oversight Board (PCAOB) announced late last week that it had signed a Statement of Protocol with China’s Securities Regulatory Commission (CSRC) and Ministry of Finance (MoF). This move is described as the “first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong, consistent with U.S. law.”
The agreement comes in response to the Holding Foreign Companies Accountable Act (HFCAA), introduced by the U.S. in 2020, which mandates that any foreign-based company listed on U.S. exchanges must allow auditors registered with the PCAOB to conduct full financial inspections within three years or face delisting. The U.S. Securities and Exchange Commission (SEC) began issuing compliance notices to Chinese companies – including several pharmaceutical and biotech firms – starting in March of this year.
Described as the most detailed and prescriptive agreement ever reached between the PCAOB and China, the protocol includes three key provisions that “if abided by, would grant the PCAOB complete access for the first time”:
- The PCAOB has sole discretion to select the firms, audit engagements, and potential violations it inspects and investigates – without consultation with or input from Chinese authorities.
- Procedures are in place for PCAOB inspectors and investigators to view complete audit work papers, including all information, and retain any necessary data.
- The PCAOB has direct access to interview and take testimony from all personnel associated with the audits it inspects or investigates.
According to the agreement, the next step will involve PCAOB staff beginning on-site inspections of China-based companies by mid-September. However, the notice warns: “Whether the PCAOB can make a determination that China is no longer obstructing access depends on whether China abides by this agreement and allows for full and timely access to information.” Notably, several Chinese pharmaceutical companies listed on U.S. exchanges – including biotech heavyweights like BeiGene (NASDAQ: BGNE, HKG: 6160, SHA: 688235), HutchMed (HKG: 0013, NASDAQ: HCM), Zai Lab (NASDAQ: ZLAB), and Legend Biotech Corp. (NASDAQ: LEGN) – remain on the SEC’s list of companies at risk of delisting.-Fineline Info & Tech
