China asks firms, auditors to prepare for U.S. checks in Hong Kong -sources

By Xie Yu and Julie Zhu

HONG KONG, Aug 26 (Reuters) - Beijing has asked some U.S.-listed Chinese companies and their audit firms to prepare for American inspections in Hong Kong, three sources familiar with the matter told Reuters, as part of efforts to end a more than decade-old audit dispute.

The China Securities Regulatory Commission (CSRC) recently gave verbal notices to some audit firms, advising them to start preparing paperwork to move staff and documents to Hong Kong, one of the sources said on Friday.

It is asking them to do so as it expects the countries to reach an agreement soon to resolve the dispute over the auditing compliance of U.S.-listed Chinese firms, the source added.

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

But the CSRC recently informed U.S.-listed Chinese firms that they should be prepared to transfer audit working papers and other relevant material from the mainland to Hong Kong for future U.S. on-site inspections, the other two sources said.

Hong Kong will become the on-site inspection hub for U.S. regulators and Chinese companies listed in America will have to transfer their working papers to the city, as per the latest proposal drafted by the CSRC, the second source said.

The sources spoke on condition of anonymity as they were not allowed to speak to media on the matter.

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

The U.S. Public Company Accounting Oversight Board (PCAOB), which oversees audits of U.S.-listed companies, did not respond to a Reuters request for comment outside U.S. business hours.

The Wall Street Journal reported on Thursday that the United States and China were nearing an agreement allowing American accounting regulators to travel to Hong Kong to inspect audit records of New York-listed Chinese companies.

DELISTING RISKS

By Friday, 163 companies, including Alibaba Group (BABA.K) , JD.Com Inc (JD.O) , and NIO INC (NIO) had been identified by the U.S. regulator as facing trading prohibition risks for not complying with audit requirements.

However, Asian shares rose on Friday, buoyed by hope China and the United States would hammer out an audit deal to solve the delisting risks facing these Chinese firms.

Reuters could not immediately ascertain if U.S. regulators had accepted CSRC’s suggested measures on inspecting audited papers in Hong Kong.

PCAOB last month said it would not accept any restrictions on its complete access to the audit papers of Chinese companies listed in New York and that it was standing ready with the necessary resources for inspection.

Current U.S. rules stipulate that Chinese companies that are not in compliance with audit working papers requests will be suspended from trading in America in early 2024. But there is a chance that in the coming months the U.S. Congress may move up the deadline to comply to the spring of 2023.

Earlier this month, 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.