China blinks on PCAOB | China Accounting Blog | Paul Gillis

China blinks on PCAOB

Caixin has reported($$ paywall) some amazing comments from CSRC chairman Yi Huiman. Yi reportedly said that: “As long as the U.S. side is truly willing to solve the problem, we can definitely find a way for China and the U.S to cooperate on audit regulation”  HT to Donald Clarke for tipping me off on this. 

Yi further added: Chinese law stipulates that exchanging information, such as providing audit working papers for overseas regulators, should be conducted through regulatory cooperation and comply with security and confidentiality regulations. Carrying out joint inspections is a common practice of international cooperation on this issue.

I doubt Yi is unaware of the fact that China has blocked inspections since the passage of Sarbanes Oxley in the early 2000s. The U.S. has certainly shown its willingness to solve the problem, even agreeing to a joint trial inspection that was called off when Chinese regulators would not allow the PCAOB to see documents or ask questions.  

Yi is correct that joint inspections are the common practice of international cooperation. I believe this is the first time Chinese authorities have sanctioned that approach. Formerly they argued for regulator equivalency, where US regulators would rely on Chinese regulators to examine auditors.  The PCAOB has long rejected that approach, although it was adopted by the EU. 

I suspect that Yi’s comments are a signal that China will back down on this issue, allowing joint inspections with adequate controls to protect state secrets.  

I have written a longer piece on the legislation working its way through congress and see four possible outcomes: 1) China backs down and allows inspections 2) Listings move to Hong Kong 3) Companies go private, potentially relisting on mainland exchanges, 4) Companies go dark, stopping communications with regulators and shareholders. That piece is available through GMT Research.  I will be posting it here next month.  That piece was written before Yi’s comments, and I think the probablity of 1) has gone way up. 

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