China and the US signed an agreement on audit regulation and will launch the cooperation in the near future, according to a statement.
Chinese and US regulators have reached a preliminary agreement on the audit of Chinese companies listed in New York, which is expected to address a key risk that has plagued many investors for the past year or two.
The China Securities Regulatory Commission (CSRC), the Ministry of Finance and the US Public Company Accounting Oversight Board (PCAOB) signed an audit regulatory cooperation agreement on August 26 and will launch the cooperation in the near future, according to a statement posted on the CSRC's website.
The statement did not mention exactly when the cooperation will start, but according to a Wall Street Journal report Thursday, US accounting inspectors could arrive in Hong Kong as soon as next month to make sure it has full access to audit working papers, paving the way for a final agreement.
The deal makes clear agreements on cooperation between the two sides on regulatory inspection and investigation activities of accounting firms, forming a framework for cooperation that meets the regulatory and supervisory requirements of both sides, the CSRC said in a statement today.
This is an important step forward for both Chinese and US regulators in addressing the common concern of audit regulatory cooperation and lays the groundwork for the next phase of cooperation between the two sides to move forward, according to the statement.
The signing of the agreement marks a key step forward for the US and China to address audit oversight issues for US-listed Chinese companies through cooperation, in line with market expectations and anticipation, the CSRC said in a separate Q&A.
As a next step, the two sides will conduct routine inspection and investigation activities on the cooperation of relevant accounting firms in accordance with the cooperation agreement and make assessments of the effectiveness of the cooperation.
If the follow-up cooperation can meet the respective regulatory needs, it is expected to address the audit supervision of Chinese companies listed in the US, thus avoiding delisting from the US, the Q&A said.
"We look forward to actively promoting cooperation with the US regulators in a professional and pragmatic manner and working together to achieve positive results," the CSRC said.
The CSRC did not mention details of how the two sides will work together next. The Wall Street Journal report yesterday mentioned that the US-China agreement will allow US accounting regulators to travel to Hong Kong to examine the audit records of Chinese companies listed in New York.
Securities regulators in Beijing are making arrangements for US-listed Chinese companies and their accounting firms to transfer their audit workpapers and other data from the Chinese mainland to Hong Kong, according to the report.
Regulators from the US PCAOB will then travel to Hong Kong to conduct on-site inspections of the Chinese companies' auditors and their records, the report said.
Notably, after the CSRC's statement was released, Hong Kong's Financial Reporting Council also issued a statement saying it supports mutual cross-border cooperation and will provide all necessary assistance and make appropriate arrangements within the scope of its authority.
Preserving the status of Chinese companies listed in the US is good for investors, good for those companies, and good for both the US and China, the CSRC's Q&A said.
It's a win-win institutional arrangement that is an important basis for both sides to be able to sit down and negotiate and reach an agreement.
The primary function of the audit paper is to document whether the auditor verified the accuracy of the company's financial information in accordance with auditing standards, so it generally does not include sensitive information such as state secrets, personal privacy or underlying corporate data, the Q&A said.
It is important to note that audit oversight is directed at the accounting firm, not the public company it audits, according to the Q&A.
The development clearly boosted investor sentiment, as a large number of Chinese stocks that were down in pre-market trading quickly turned significantly higher in early trading on Friday.
China, US near deal on audit paper inspections of US-listed Chinese firms, report says
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