An agreement reached Friday between the United States and China would permit American accounting officials to visit Hong Kong to review the audit records of Chinese companies listed on U.S. exchanges.
It's the first time China has given the U.S. the ability to perform Public Company Accounting Oversight Board (PCAOB) inspections and investigations that comply with American standards, Securities and Exchange Comission Chair Gary Gensler told CNBC.
“For 18 years or so, we have not been able to look at the work papers of various auditing firms in China,” he said.
“It’s a great privilege to be in the U.S, we have the deepest, most liquid capital markets — and if [China] wants to issue here in the U.S, and tap into the investments in the U.S, then they’ll have to comply with [our] laws.”
Gensler said that investors in U.S. markets should be protected and able to trust a company's financial statements.
“Further, if foreign issuers want access to our public capital markets, they must be on a level playing field with U.S. firms.”
“We’re effectuating the will of Congress,” the SEC chair said, “but again, the proof will be in the pudding. We’ll have to see over the next few months how compliance goes.”
The SEC expects to have inspectors on the ground in Hong Kong as soon as Septmeber, he said.
Why It Matters: The delisting of Chinese stocks remains a possibility. More than 50 jurisdictions have agreed with the demands that the PCAOB inspect and investigate audit firms of U.S.-listed businesses, regardless of where the audit company is situated.
China and Hong Kong are the two that have not complied with guidelines created last year by the PCAOB.
“This annual determination needs to be made by December, that’s why it’s so important to get people on the ground by mid-September.” Gensler said. “If it’s a negative determination, it may well be that these companies will have to delist.”
The Holding Foreign Companies Accountable Act (HFCAA) of 2020's necessity for thorough inspections and investigations was recently reiterated by Congress.
According to the HFCAA, if the PCAOB is "unable to inspect or investigate completely" registered public accounting firms in foreign countries for three consecutive years, issuers that have used those firms — in this case, about 200 Chinese companies — risk having their securities halted from trading in the United States.
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