US Authorities Begin Investigating Chinese Companies Listed On Wall Street

A team of US audit experts has arrived in Hong Kong to begin a review of the audit records of US-listed and China-based companies.

The findings of the auditing experts could determine the fate of around 200 Chinese companies that face potential delisting from US exchanges.

The inspectors from the Public Company Accounting Oversight Board (PCAOB), established by US Congress to oversee the audits of public companies, arrived in the city on Monday to look into the audit records of selected Chinese firms, after Washington's insistence that US officials also be given access to the accounts.

The team is expected to focus on the auditing work of the Big Four accounting firms -- PwC, Deloitte, KPMG and EY -- which audit around 130 US-listed mainland companies, or about 80 per cent of the total.

What triggered the US review

Since 2008, the number of Chinese companies listing on the US stock exchanges has steadily increased. However, the headquarters of most of these companies were in Beijing or Hong Kong.

Therefore, no audit reports and other financial records were made available to the regulators in the US in the garb of state secrets and national security concerns.

Most Chinese entities listed in the US are audited by the likes of PwC and Deloitte but the records of those audits are held in China.

According to a Nikkei Asia report, US authorities argue that inspections and investigations are "some of the most important tools" they have for protecting investors.

In September 2020, Washington introduced the Holding Foreign Companies Accountable Act (HFCAA) to ensure greater scrutiny and transparency regarding auditing the Chinese companies listed in the US.

As per the rules, the US Securities and Exchange Commission (SEC)-appointed Public Company Accounting Oversight Board (PCAOB) can inspect auditors of the publicly traded companies.

Under HFCAA, the companies refusing to comply or disclose audit records before the PCAOB could be delisted by 2024.

In March 2022, the SEC started publishing a list of the companies that could be delisted from the American stock exchanges, citing non-compliance.

In August 2022, five Chinese companies, backed by the communist regime in Beijing, announced that they would be delisting from the New York Stock Exchange (NYSE).

Following the delisting of CCP backed firms, China’s Securities Regulatory Commission signed an agreement with PCAOB last month, paving the way for Beijing to allow accounting firms to bring audit records from the mainland to Hong Kong for the PCAOB inspectors to review, addressing the US audit regulator’s complaint about being unable to check audit quality.

Following the China regulator's nod, the PCOAB team has now arrived in Hong Kong.

Top Chinese firms under US auditors' radar

The PCAOB team is expected to initially focus on inspection of a handful of companies that may include Alibaba, JD.com and Yum China apart from KFC and Pizza Hut's Chinese operator.

However, the number of firms selected for the audit could reach 20.

The team's choices will be based on a number of factors that contribute to "the level of risk" posed to investors, including the size of the company and type of industry.

The inspections are retrospective, which means that ride-hailing company Didi Global -- which delisted from New York but is still traded off-exchange in the US -- as well as the five state-owned enterprises that announced voluntary delisting from the U.S. last month could also be selected.

Fate of Chinese firms depends on findings of PCAOB team

The PCOAB investigators will do a thorough investigation in a bid to determine whether Chinese firms are in compliance with US law by the end of this year.

The team could also select all of the state-owned enterprises that China forced to delist last month.

If the PCOAB is not satisfied with the results of its inspections, then Chinese companies' securities could be barred from US markets as early as 2023.

Even in the case of a positive report by PCOAB, it is unclear whether China would continue to provide US authorities full access to audit records next year.

In the event that China does not fulfill the US' requirements, Washington is likely to put even stricter measures in place, including passage of the Accelerating Holding Foreign Companies Accountable Act (AHFCAA).

Under the AFFCAA, a delisting would happen if inspections do not occur for two consecutive years rather than three.

Also Read: Explained: Why Chinese Companies Are Delisting From US Stock Exchanges