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Zinger Key Points
  • The PCAOB secured complete access to inspect and investigate registered public accounting firms headquartered in China.
  • The unprecedented access silences concerns that some 138 U.S.-listed Chinese stocks would be delisted from U.S. exchanges.

According to the Public Company Accounting Oversight Board (PCAOB), a team of American regulators has concluded negotiations with two Hong Kong accounting firms on their audits of mainland Chinese businesses that may be delisted from US exchanges.

What Happened: This suggests that the unprecedented assessment is just getting started, and additional material might be released as early as the end of this year, potentially determining the future of around 168 Chinese companies with U.S. listings.

Between September and November, two teams of inspectors, totaling more than 30 PCAOB employees, spent around nine weeks at the PwC and KPMG headquarters in Hong Kong.

The auditors interrogated the firms' accountants regarding their audits of the mainland companies after reviewing hundreds of working papers.

“This historic and unprecedented access was only possible because of the leverage Congress created by passing the Holding Foreign Companies Accountable Act [HFCAA],” PCAOB chair Erica Williams said in a statement.

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The PCAOB's announcement on Thursday shouldn't be interpreted as giving mainland Chinese and Hong Kong companies the all-clear.

It acknowledges that U.S. authorities can now, for the first time in history, conduct exhaustive inspections and investigations to find possible issues and hold businesses responsible for fixing them.

“This is the beginning of the PCAOB’s work to inspect and investigate firms in mainland China and Hong Kong, not the end,” Williams said.

Why It Matters: For their full-year 2021 annual report filings, the SEC identified approximately 138 businesses that depended on auditors with headquarters in mainland China and Hong Kong that the PCAOB has assessed to be "non-compliant" in accordance with the HFCAA.

Companies so identified by the SEC in 2022 were expected to be subject to a securities trading suspension and might be delisted from U.S. exchanges by 2024 under the terms of the HFCAA.

U.S.-listed, mainland stocks including Alibaba Group Holding Ltd - ADR BABA, Daqo New Energy Corp DQ, Group Ltd TCOM, and others spiked on the news before falling back to pre-market levels.

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Posted In: GovernmentNewsRegulationsTopicsGlobalTop StoriesSECMarketsTrading IdeasGeneralPCAOB
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