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Analysis: A deal between the U.S. and China on audits is not yet done, lawyers say

Image: Reuters Berita 24 English -  Investors in Chinese companies listed in the U.S. felt a lot better after Beijing and Washington reached...

Image: Reuters

Berita 24 English -  Investors in Chinese companies listed in the U.S. felt a lot better after Beijing and Washington reached a long-awaited audit deal. However, legal experts and people who follow China warn that the two sides could still disagree about how the agreement is interpreted and carried out.

U.S. regulators have been asking for access to audit papers of Chinese companies listed in the U.S. for more than a decade, but Beijing has been reluctant to let U.S. regulators check out its accounting firms, citing concerns about national security.

On Friday, however, the countries reached a historic deal that seemed to give the United States everything it wanted: full access to China audit papers with no redactions for any reason, the right to take testimony from audit company staff in China and Hong Kong, and the right to choose which companies the United States inspects.

Investors said the deal was a big win for Chinese companies listed in the U.S., but Monday's fears of a long period of rising interest rates around the world made people less willing to take risks, which slowed the rise in share prices.

Legal experts warned that investors may be too optimistic. They pointed out that the two sides' different ways of putting things in writing could lead to problems when the deal is put into action next month.

They said that it would take the Public Company Accounting Oversight Board (PCAOB), which is in charge of audits in the U.S., some time to see if China was following the deal as promised.

"I think it's important to break the stalemate and come to a deal that works for both sides," said Hung Tran, a senior fellow at the Atlantic Council, a U.S. think tank.

"But we won't know what it really means until we see if the access, process, and real review of auditing trails can be done in a way that meets the requirements of U.S. law.

In a statement released on Friday, the PCAOB said that the agreement would give full access to U.S. regulators as long as it was followed.

Beijing's statement, on the other hand, emphasised that the principle of cooperation between the two countries is "equal." This means that the U.S. side will have to get documents from the Chinese regulator and will have to let the Chinese side coordinate interviews and testimony.

The China Securities Regulatory Commission (CSRC), which called the agreement an important step for investors, companies, and both countries, said that the audit problem won't be solved until cooperation "meets regulatory requirements on each side."


There have been times when the two sides couldn't work together.

For example, the PCAOB spent a lot of time and money negotiating a Memorandum of Understanding (MOU) with the Chinese government in 2013 to work together on audit enforcement, but they later decided they still couldn't get access to enough information, according to official statements from the time.

Lawyers say that a lot will depend on which of the more than 200 Chinese companies that trade in the U.S. are chosen for an inspection by the PCAOB. Officials from the PCAOB said on Friday that they had told the chosen companies and would start looking at their audit papers next month. They did not name the companies.

A PCAOB spokeswoman told Reuters that agency officials had said on Friday that the PCAOB would choose companies based on risk factors like size and sector, and that no company could expect to be treated differently.

If the PCAOB chooses well-known companies with lots of sensitive data, there could be problems quickly, but lawyers say the PCAOB is unlikely to give in to pressure from China because it is under a lot of political scrutiny at home.

Marcia Ellis, a lawyer at Morrison & Foerster who works in Hong Kong, pointed out that the deal's need for audit paper access was still at odds with China's strict data security rules.

A spokesman for the U.S. Securities and Exchange Commission, which is in charge of the audit watchdog, refused to comment. However, Gary Genslery, who is in charge of the agency, said on Friday that the deal will only be important if U.S. officials get the promised access.

Reuters asked the CSRC for a comment, but they didn't answer right away.

For the PCAOB to say that China as a whole is in compliance, all of the selected companies and audit firms must be in full compliance.

Paul Leder, who used to run the SEC's office of international affairs, said that the PCAOB would not take any shortcuts when putting this agreement into place.

"It knows that both the SEC and Congress will want assurances that the PCAOB has the same access to information when inspecting a Chinese audit firm as it does when inspecting one in the U.S.," said Leder, who is now a counsel at law firm Miller & Chevalier.

Even if the deal goes through, China is likely to keep some companies from going public in the U.S. in the future, said Morrison & Foerster's Ellis, because of the ongoing conflict over giving access to sensitive data.

"Even if the PCAOB problem is fixed, we think that Chinese companies with sensitive data that haven't listed yet will choose to list in Hong Kong," she said.

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