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TIMELINE-U.S. and China reach audit deal in boon for Chinese companies

·4 min read

By Xie Yu and Samuel Shen

HONG KONG, Aug 26 (Reuters) - Beijing and Washington took a major step on Friday towards ending a dispute that threatened to boot Chinese companies from U.S. stock exchanges, signing a pact to allow U.S. regulators vet accounting firms in China and Hong Kong.

U.S. regulators have long demanded access to audit papers of Chinese companies listed in the United States, but Beijing has been reluctant to let overseas regulators inspect accounting firms, citing security concerns.

Here is a timeline of the main events in the dispute --


The Sarbanes-Oxley Act of 2002, designed to protect shareholders against fraud, became U.S. law on July 30, in the aftermath of a number of large scandals involving public companies that sent shockwaves through global financial markets.


Created by the Sarbanes-Oxley Act of 2002, the Public Company Accounting Oversight Board (PCAOB) opened its doors in 2003, with a mission to oversee the audits of public companies in order to protect investors.

PCAOB is authorized by the Act to inspect and investigate registered public accounting firms that audit U.S.-listed companies, no matter where the firms are based.


In 2007, PCAOB began discussions with China's securities regulator and the country's finance ministry, seeking a bilateral agreement that would enable PCAOB to conduct inspections of auditing firms in China.

The China Securities Regulatory Commission (CSRC) and the Ministry of Finance (MOF) have since insisted that a cooperative agreement, as well as authorities' consent, are required before the PCAOB can access audit documents from firms based in China.


On Oct. 20, 2009, China published rules, dubbed "Regulation 29", making clear that audit work papers of overseas-listed Chinese companies shall be stored in China, and must not be moved overseas or delivered to overseas institutions without authorities' approval.

In addition, the rules, aimed at strengthening management of state secretes, stated that on-site inspections must be conducted mainly by Chinese regulators, or rely on the results of the inspections conducted by Chinese authorities.


The PCAOB and the Chinese regulators reached a preliminary agreement on audit oversight. It allows periodic observational visits to be made by the PCAOB to China.

The PCAOB conducted an onshore inspection tour in China, according to a statement by the CSRC.


The PCAOB signed a deal with China which allowed access to audit work in connection with investigations, but still blocked routine inspections of the audit firms. The PCAOB later deemed the access "not sufficient".


Then PCAOB chairman Jim Doty said the regulator was close to striking a deal that would allow Washington to inspect the audit work of accounting firms in China.

Doty later said that the audit talk reached a "difficult and frustrating place".


In 2016, the PCAOB started a pilot inspection of a mainland China accounting firm, but could not complete it after Chinese authorities withheld or redacted necessary information due to national security concerns, according to a PCAOB disclosure.

CSRC Chairman Yi Huiman told Chinese magazine Caixin in June, 2020, that China helped the PCAOB review the firm's quality control system, as well as the work papers of three U.S.-listed Chinese companies during the pilot scheme, and the cooperation was "productive."


Between November 2016 and December 2017, PCAOB staff travelled to Beijing three times to meet with CSRC and MOF officials to resolve their disputes, but the good-faith effort yielded little progress, according to the PCAOB.


China's revised Securities Law came into effect on March 1, 2020, with Article 177 barring institutions and individuals from providing documents or materials related to securities business activities in China to overseas parties.

The Holding Foreign Company Accountable Act (HFCAA) was officially written into law by U.S. President Donald Trump.


The U.S. Securities and Exchange Commission (SEC) said it would start identifying issuers with potential trading prohibitions based on PCAOB's annual determination and on the companies' annual reports filed for fiscal years beginning 2021.

The PCAOB Board made its first determinations under the HFCAA, finding that it is unable to inspect or investigate completely registered accounting firms based in China and Hong Kong.


The SEC named the first 5 companies, including Yum China and Zai Lab, as potential delisting candidates if they fail to meet the audit rules.

Chinese financial regulators proposed revising "Regulation 29", scrapping requirements that on-site inspections of overseas-listed Chinese firms be conducted mainly by domestic regulators.

Five Chinese state-owned enterprises (SOEs) voluntarily filed to delist from New York, a move interpreted by analysts as removing a hurdle for Beijing to strike an audit deal with the United States. (Reporting by Samuel Shen and Xie Yu; Editing by Sumeet Chatterjee and Carmel Crimmins)