“The real test will be whether the words agreed to on paper translate into complete access in practice,” PCAOB Chair Erica Williams said in a statement, adding that the agreement has “no loopholes and no exceptions.”
Washington and Beijing have been at odds for years over the PCAOB’s inability to inspect the auditing of China- and Hong Kong-based companies listed on the New York Stock Exchange and Nasdaq.
Since the early 2000s, the U.S. has required all publicly traded companies to provide the PCAOB with the ability to inspect their auditors. But China and Hong Kong have long resisted the calls, often on the grounds of national security concerns.
In 2020, U.S. lawmakers moved to force Beijing’s hand with the passage of the Holding Foreign Companies Accountable Act. The law, passed following a rare show of bipartisanship in Washington, effectively started the clock ticking on China and the U.S. to reach an agreement to allow for the PCAOB to inspect the audits. Under the law, companies that are found to not have allowed the PCAOB complete access for three straight years would risk being kicked off U.S. exchanges.
“Foreign companies operating on U.S. markets should be held to the same standards across the board,” said Sen. Chris Van Hollen (D-Md.), who first introduced the legislation along with Sen. John Kennedy (R-La.), in a statement Thursday. “I applaud today’s action by the PCAOB — achieving the crucial first step of getting the Chinese government to agree to these requirements — which for the first time will ensure all companies operating in the U.S. markets are held to the same audit standards.”
A deal seemed to be far from guaranteed just a month ago. In July, SEC Chair Gary Gensler said he was “not particularly confident” that one would be made. And the pressure only mounted in August, when five of China’s largest state-owned firms unveiled plans to voluntarily delist from the New York Stock Exchange. But the two sides were ultimately able to come together to reach the terms of Thursday’s agreement.
In a statement, the China Securities Regulatory Commission called the agreement “an important step forward by regulators in China and the U.S. towards resolving the audit oversight issue that concern mutual interests, and lays the foundation for proactive, professional and pragmatic cooperation of the next stage.”
Still, U.S. regulators caution that the deal is only part one of averting an additional wave of delistings from New York. If the PCAOB cannot “inspect and investigate completely audit firms in China,” Gensler said Thursday that China-based issuers are still at risk of facing trading prohibitions on their U.S. securities.