China Removes Audit Secrecy Rules in Long-Running US Listing Row​

By BK​

What do you need to know this week?

China’s Securities Regulatory Commission (CSRC) has proposed key changes to the rules affecting Chinese companies listed abroad in an effort to settle a long-standing auditing dispute with the US.

Traditionally, on-site inspections of overseas-listed Chinese companies must be conducted mainly by Chinese regulators.

This new proposal would remove some of these requirements, opening up inspections by the US Public Company Accounting Oversight Board (PCAOB). It would also place the onus on Chinese companies to protect state secrets by tightening the sanctions on Chinese companies for any failure of compliance or breaches of confidentiality,

Why is this important for your interviews?

Under the CSRC’s rules last issued in 2009, it is illegal to share audit documents produced while listing Chinese companies overseas with foreign entities. This clashes with the US Holding Foreign Companies Accountable Act 2020, enacted in the twilight of the Trump administration, which requires Chinese companies to allow US regulators, such as the PCAOB, to examine their audits in order to list in the US.

The CSRC’s announcement is Beijing’s most significant concession to try to prevent 270 New York-listed Chinese companies, with a combined market capitalisation of $2 trillion, from being delisted in 2024 should these companies fail to produce their audits to US regulators. The move comes after the US Securities and Exchange Commission added Chinese search engine company Baidu to its list of US-traded China stocks that could be delisted if US regulators are barred from reviewing at least three years’ worth of financial audits.

Markets are reacting favourably after the CSRC’s announcement - New York-listed Chinese stocks such as Alibaba, JD.com and Baidu jumped 2.3% to 6.6% on Friday. In addition, Hong Kong stocks have reached a 5-week high.

How is this topic relevant to law firms?

The uncertainty over the CSRC and SEC rules in the backdrop of the wider US-China geopolitical conflict has led to a surge in secondary listings of Chinese companies in Hong Kong over the last three years. This has led to a stream of steady corporate and IPO work for international law firms with a strong Hong Kong-presence in corporate such as Clifford Chance, Kirkland & Ellis and Latham & Watkins.

In addition, although the CSRC’s proposals make some headway into easing the audit rules tension, the solution may be half-baked as some Chinese companies in possession of greater ‘sensitive information’ may not be able to fulfill the audit requirements of both countries. This will require law firms to continue to keep their China-based clients updated on any regulatory barriers and corporate governance issues on listing in the US left unchanged by the CSRC’s proposals.

Finally, it is unclear what impact the CSRC’s proposals has on the PCAOB’s concern over the “monopoly” 15 China and Hong Kong-based accounting firms have on US-listed Chinese companies. These 15 firms have been responsible for the auditing of 191-listed Chinese firms with a $1.9 trillion in market value and not one has been inspected since 2010. Accounting firms will need to seek specialist regulatory advice from law firms on how to manage, protect and officially disclose any information to relevant regulators in order for business to continue to operate. The precise extent of allowable disclosure of sensitive auditing information will likely become the new quagmire of US-China geopolitical tension, with huge economic implications at stake for both parties.


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