China is ready to collaborate with the U.S. on an audit deal, as stated by the China Securities Regulatory Commission (CSRC).
The announcement comes in response to recent findings of deficiencies in audits of U.S.-listed Chinese companies by the U.S. Public Company Accounting Oversight Board (PCAOB).
China’s audit deficiencies identified by PCAOB
The PCAOB published its inspection findings after gaining access to Chinese company auditors’ records for the first time last year. The report revealed unacceptable deficiencies in audits of U.S.-listed Chinese companies.
However, the CSRC has expressed its willingness to work with its U.S. counterparts to promote audit regulatory cooperation and safeguard the rights and interests of global investors.
The CSRC, in a statement to Reuters, said the deficiencies found by the PCAOB during their first-time inspection were normal and that Beijing would continue to work with the U.S.
The inspections came after more than a decade of negotiations with Chinese authorities and were part of a September deal that prevented nearly 200 China-based public companies, including Alibaba and JD.Com, from being potentially delisted from U.S. stock exchanges.
Challenges in improving auditing practices
Analysts believe that the deficiencies identified by the U.S. watchdog are unlikely to derail the audit deal between the two countries. However, it could be challenging to quickly improve auditing practices amid ongoing U.S.-China tensions.
Former regulators and analysts suggest that auditors of Chinese companies based in mainland China and Hong Kong will need to put in considerable effort to address the findings.
Jackson Johnson, a former PCAOB inspector and president of the audit advisory firm Johnson Global Accountancy, stated that high deficiency rates were expected in the short term.
He added that auditors would need to improve their results before the next inspection, indicating a significant amount of work to be done.
Impact on stock delisting
Despite the high deficiency rate in PCAOB findings, Weiheng Chen, senior partner at law firm Wilson Sonsini, said the deficiencies would not result in the restatement of a company’s financial statements. Consequently, these deficiencies alone would not cause any stock delisting.
In March, it was reported that the PCAOB began a new round of inspections in Hong Kong as part of the deal, which is a rare positive development in Sino-US relations.
The deal comes at a time when some business leaders have expressed concerns about the decoupling of the world’s two largest economies.
The CSRC emphasizes its commitment to working with the U.S. regulator to advance audit cooperation based on mutual respect and trust. The CSRC aims to build a normalized, sustainable cooperation mechanism to protect the rights and interests of global investors.
As China and the U.S. continue to address audit deficiencies, this collaboration has the potential to enhance transparency and trust in the financial markets, benefiting investors and companies alike.
