The U.S. Securities and Exchange Commission has warned American audit firms to be wary of taking on Chinese firms that trade in New York as new clients.
Some U.S.-listed Chinese and Hong Kong firms have lately shifted their primary auditor from a local to a U.S. or other foreign firm, fearing exclusion from U.S. exchanges if China does not allow the SEC's accounting authority to evaluate Chinese company audits, according to the SEC.
The warning was issued in the wake of numerous corporations switching to U.S. auditors amid an ongoing disagreement between regulators in Washington and Beijing over access to audit work files, which might result in the delisting of approximately 200 companies from American stock markets.
"Such arrangements pose special challenges that raise questions about whether the newly engaged registered public accounting firms ... will be able to satisfy their responsibilities," the SEC's Acting Chief Accountant Paul Munter wrote.
Munter pointed out that foreign auditors may lack the local knowledge, proficiency, linguistic abilities, or access to firm personnel required to carry out thorough audits.
Since more than 10 years ago, U.S. regulators have wanted access to the audit records of Chinese companies that are listed on U.S/ exchanges, but Beijing has been reluctant to allow foreign regulators to check out its accounting firms due to national security concerns.
In recent months, a number of Chinese businesses switched from using auditors located in China to those headquartered outside in the hopes that doing so would eliminate the possibility of being delisted.
In late 2020, the U.S. approved the Holding Foreign Businesses Accountable Act (HFCAA), which threatens to delist New York-listed Chinese companies that fail to comply with U.S. audit regulations for three years in a row.
While both parties agreed to a preliminary agreement last month to let the SEC's accounting watchdog, the Public Company Accounting Oversight Board (PCAOB), access to Chinese audit papers, it is unclear whether that agreement would be implemented.
If the deal fails, almost 200 Chinese issuers listed in the U.S. could be delisted.
"This is a warning from the SEC that alternative audit engagement structures designed to avoid the uncertainty under the HFCAA entail investigation and enforcement risks from the U.S. regulators," Jessica Zhou, partner at Hong Kong law firm White & Case, said.
The SEC notice reminds any retained lead auditors, among other things, of their responsibilities under the applicable PCAOB rules, she continued, including "the production of any audit work papers upon any PCAOB inspection or investigative demand".
That duty is related to the challenges of adhering to both Chinese and American laws.