Analysis – US-China audit deal far from over, lawyers warn

By John McCrank, Samuel Shen and Xie Yu

NEW YORK/SHANGHAI (Reuters) – There was much relief for investors in U.S.-listed Chinese companies after Beijing and Washington struck a long-running control deal, but legal experts and China observers warn the two sides could come in conflict over how the agreement is interpreted and applied.

US regulators have demanded access to audit documents of US-listed Chinese companies for more than a decade, but Beijing has been reluctant to let US regulators inspect its accounting firms, citing national security concerns.

On Friday, however, the countries reached a landmark agreement that appeared to give the United States what it wanted: full access to China’s control documents without any modification for any reason. the right to receive testimony from audit firm personnel in China and Hong Kong; and the sole discretion to select which firms the United States inspects.

Investors said the deal was a major boon for U.S.-listed Chinese companies, but share price gains were capped by a fresh round of risk aversion on Monday, fueled by concerns about a prolonged period of global interest rate hikes.

Legal experts warned that investor optimism may be premature, pointing to the nuance in the two sides’ wording as a cause for potential clashes as implementation of the deal begins next month.

They noted that it will take some time for the PCAOB, the US audit watchdog, to check whether China is faithfully complying with the agreement.

“Breaking the tie and reaching an agreement for both sides, I think is important,” said Hung Tran, a senior fellow at the Atlantic Council, a US think tank.

“But the real meaning of it will take some time to see if the access and the process and the actual review of audit trails can be done in a way that satisfies the requirements of US law.

Friday’s PCAOB statement said the agreement, “if followed,” would provide full access to U.S. regulators.

Beijing’s statement, however, stressed that the principle of bilateral cooperation is “equal”, and the US side should obtain documents through the Chinese regulatory authority and should engage and let the Chinese side coordinate the interview and reception testimonies.

The Securities Regulatory Commission (CSRC), which described the agreement as an important step for investors, companies and the two countries, said the control issue is expected to be resolved only if the partnership “meets regulatory requirements on each side ».

SENSITIVE DATA

There are precedents when cooperation has broken down between the two sides.

For example, the PCAOB spent significant time and resources negotiating a Memorandum of Understanding (MOU) with Chinese authorities on enforcement cooperation in 2013, but later determined that they still could not gain sufficient access to information, previous records show. official statements.

Much will depend on which of the more than 200 U.S.-listed Chinese companies the PCAOB selects for inspection, the lawyers said. PCAOB officials said Friday that they had notified the selected companies and expected to begin inspecting their audit documents next month, but did not name them.

A PCAOB spokeswoman referred Reuters to comments made by agency officials on Friday that the PCAOB would select companies based on risk factors such as size and sector, and that no company could expect special treatment.

If the PCAOB singles out high-profile companies with lots of sensitive data, conflicts could quickly arise, but the PCAOB is unlikely to back down to any pushback from China given that it is under intense political scrutiny at home, lawyers said.

Marcia Ellis, a Hong Kong-based lawyer at Morrison & Foerster, pointed out that the access to control paper required by the agreement was still in tension with China’s strict data security rules.

A spokesman for the US Securities and Exchange Commission, which oversees the watchdog, declined to comment, but on Friday the agency’s chairman Gary Genslery warned that the deal would only make sense if US officials got the access they had promised.

The CSRC did not immediately respond to a Reuters request for comment.

All companies and audit firms selected must be in full compliance in order for the PCAOB to conclude that China is in compliance with the jurisdiction.

“The PCAOB will not cut any corners in implementing this agreement,” said Paul Leder, former director of the SEC’s office of international affairs.

“He knows that both the SEC and Congress will want assurances that the PCAOB has the same access to information when it inspects a Chinese audit firm as it does a U.S. one,” said Leder, who is now of counsel at the law firm Miller & Knight.

Even if the deal goes through, China is likely to remove some companies from US lists in the future, given the ongoing underlying conflict over providing access to sensitive data, Morrison & Foerster’s Ellis said.

“We expect that Chinese central companies with sensitive data that have not yet been imported will favor Hong Kong imports even if the PCAOB issue is resolved,” he said.

(Additional reporting by Michelle Price in Washington and Kane Wu in Hong Kong. Writing by Michelle Price; Editing by Sumeet Chatterjee & Shri Navaratnam)

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