After Beijing and Washington reached a long-awaited audit agreement, investors in U.S.-surveyed Chinese companies experienced a great deal of comfort; however, legal experts and China watchers caution the two sides could still disagree over how the agreement is understood and put into practise.
Since more than ten years ago, U.S. officials have wanted access to the audit records of Chinese companies that are listed on the American stock exchange.
However, Beijing has been unwilling to allow U.S. regulators to scrutinise its accounting firms, claiming national security concerns.
Though, the nations came to a historic agreement on Friday that appeared to start giving the United States all that it wanted: complete availability of China audit papers without any redactions for any reason, the right to question employees of audit companies in China and Hong Kong, and complete control over which businesses the United States inspects.
Investors hailed the agreement as a huge win for Chinese companies with U.S. listings, but Monday’s surge in risk aversion that was brought on by concerns over an extended period of worldwide interest rate increases restrained share price gains.
Legal professionals expressed concern that the investor exuberance may be unwarranted and pointed out that the nuances in the language used by the two parties could lead to conflicts once the deal’s execution gets underway next month.
They pointed out that it would take some time before the U.S. audit watchdog, the Public Company Accounting Oversight Board (PCAOB), could assess whether China was honestly adhering to the agreement.
I believe it is important to break the impasse and reach a compromise for all parties, according to Hung Tran, a senior member at the Atlantic Council, a U.S. research institute.
However, it will take some time to determine whether the access, the procedure, and the actual inspection of auditing trails could be done in a way that complies with U.S. law.
According to the PCAOB statement from last Friday, the deal would give American regulators full access “if abided by.”
Beijing’s statement, however, highlighted the idea of “equal” collaboration between the two sides, adding the U.S. side may have to get documents through to the Chinese regulator as well as include and let the Chinese side manage the interview and witness gathering.
The agreement, as stated by the China Securities Regulatory Commission (CSRC), is a significant step for investors, businesses, and both countries. However, the audit issue won’t be fixed, according to the CSRC, unless both sides’ regulatory standards are met in terms of collaboration.
There are examples of collaboration between the two parties breaking down.
For instance, past official statements show that the PCAOB used a lot of time and money in 2013 drafting a Memorandum of Understanding (MOU) well with Chinese officials for audit enforcement cooperation, but later decided they still could not acquire adequate information access.
The agreement is a big milestone for investors, businesses, and both countries, according to the China Securities Regulatory Commission (CSRC). However, the CSRC asserts that until all parties’ regulatory conditions for cooperation are reached, the audit issue will not be resolved.
There are instances where the two parties’ partnership fails.
As an illustration, previous official statements demonstrate that the PCAOB spent a significant amount of time and resources in 2013 formulating a Memorandum of Understanding (MOU) with Chinese authorities for audit enforcement cooperation, but even so later decided they could not obtain adequate information access.
Conflicts may soon arise if the PCAOB chooses prominent corporations that handle a lot of sensitive data, but given that it is already facing heavy political criticism at home, lawyers said the PCAOB is reluctant to give in to pressure from China.
The deal’s requirement for audit paper access, according to Marcia Ellis of Morrison & Foerster’s Hong Kong office, is still in conflict with China’s strict data security regulations.