US-China Accounting Supervision Agreement... A Positive Signal for Resolving Accounting Disputes

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[Asia Economy Reporter Kim Daehyun] With the first agreement reached in the long-standing US-China negotiations over accounting supervision rights for Chinese companies listed on the US stock market, it is being evaluated that a foundation has been laid to resolve the accounting dispute between the two countries.

On the 26th (local time), representatives from both the US and China announced that China has agreed to provide data from Chinese accounting firms auditing Chinese companies listed on the US stock market to US regulatory authorities.

The Public Company Accounting Oversight Board (PCAOB), the US accounting supervisory body, explained in a press release that through related agreements with the China Securities Regulatory Commission and the Ministry of Finance of China, the first step has been established to inspect and investigate registered accounting firms headquartered in mainland China and Hong Kong under US law.

With this agreement, the PCAOB does not need to consult or seek opinions from Chinese authorities when selecting companies for investigation. Procedures have been established to allow investigators to fully review audit working papers prepared by accounting firms and obtain necessary information. The PCAOB can interview all personnel related to the audit and collect testimonies.

Erika Williams, Chair of the PCAOB, stated, "The PCAOB now has full and unconditional access to companies selected for investigation," and said she instructed the PCAOB investigation team to prepare to begin on-site inspections by mid-next month.

The China Securities Regulatory Commission also said in a press release that this is "an important first step to resolve issues related to cooperation on audit supervision rights," and that "maintaining the listing of Chinese companies on the US stock market is a win-win outcome benefiting investors, companies, and both countries in general." However, it emphasized that this agreement applies to both the US and China.

Previously, the US had demanded for years that the PCAOB be allowed to directly investigate accounting firms registered in mainland China and Hong Kong. The rationale was that to determine whether the audit reports submitted by Chinese companies listed on the US stock market are accurate, it is necessary to directly verify whether the accounting firms comply with relevant regulations. On the other hand, China opposed this, citing that audit investigation rights pertain to sovereignty.

The US Congress enacted the Holding Foreign Companies Accountable Act (HFCAA) in 2020, which mandates the delisting of Chinese companies from the US stock market if they fail to comply with US accounting standards for three consecutive years. As a result, at least 163 Chinese companies, including Alibaba, faced the risk of delisting in early 2024. However, with this agreement, China can breathe a sigh of relief for the time being.

This content was produced with the assistance of AI translation services.