Trump administration to soon end audit deal support Chinese listings in the US

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The Trump government plans to cancel a 2013 agreement between U.S. and Chinese auditing authorities shortly. A State Department official stated a move that could imply a broader crackdown on US-listed Chinese firms below the flame for sidestepping American declaration rules.

The agreement set up a means for U.S. auditing supervisors to investigate records in execution cases against Chinese auditors was initially welcomed as a breakthrough in United States efforts to obtain access to closely guarded Chinese financial information and presented a mark of legitimacy on Chinese regulators.

However, here the supervisor is the Public Company Accounting Oversight Board (PCAOB) has complained of China’s failure to allow requests, meaning limited insight into audits of Chinese firms that trade on U.S. exchanges.

The absence of transparency has proposed government officials to place the groundwork to cancel the agreement soon, according to Keith Krach, undersecretary for economic growth, energy, and the environment, in a sign the PCAOB will address up on efforts to acquire information from the Chinese.

“The action is imminent,” Krach said in an emailed answer to questions. “It is a National Security issue as we cannot afford to put American shareholders at risk and put American companies at a loss, and allow our preeminence of being the gold standard for financial markets to decay.”

One other department official and three former White House executives said canceling the memorandum of understanding was considered, adding that the White House was associated with the discussions.

The White House denied a comment, while the PCAOB did not instantly respond to requests for comment.

In reply to Reuters, China’s Foreign Ministry said ending the memorandum of agreement would not help develop the supervision of listed companies in the United States and would hamper investors’ interests.

It said China hoped U.S. regulatory authorities would carry out regular exchanges and consultation with their Chinese counterparts to defend investors.

It was not transparent when or how the administration would cancel the agreement that needs 30-day notice by either party, and its closure would not straightly threaten the listed status of Chinese companies that trade on U.S. exchanges. Among some, more prominent Chinese companies trading in the United States are Baidu Inc. and Alibaba Group Holding Ltd.

But discussions about canceling it is a sign of rising frustration by U.S. authorities over a lack of disclosure by Chinese companies broadly held by U.S. investors that could head to a more direct crackdown. It also comes amid growing U.S.-China tensions over Beijing’s handling of the COVID-19 and its move to restrict freedoms in the former British colony of Hong Kong.

In May, the U.S government successfully urged an independent board that supervises a $40 billion international pension fund for federal employees to pause plans to track an index that includes Chinese companies and calling “risks to investors resulting from inadequate investor protection under Chinese law.”

In the beginning June, President Donald Trump appointed a group of officials including Jay Clayton, the chairman of the Securities and Exchange Commission that supervises the PCAOB, to support proposals in 60 days to protect U.S investors “from the failure of the Chinese government to provide PCAOB-registered audit firms to comply with United States securities laws.”

‘LONG OVERDUE’

Last week, PCAOB Chairman William Duhnke told them he noticed “no prospects” of properly doing its job supervising disclosures and checking accounting fraud in China.

The pressure is also rising from Congress, with the Republican-led Senate passing a bill that, if passed by the Democratic-led House of Representatives and approved into law, would prohibit securities of any foreign company from being listed on any US securities exchange if it has slipped to comply with the PCAOB’s audits for three years in a row.

Republican Senator Marco Rubio, a China hardliner, told it was “long-delayed” for the administration to take “final action” on the matter as the Senate has.

“An extension to canceling this MOU that permits Chinese companies to oppose US laws and regulations for financial transparency and answerability, we must approach the Chinese Communist Party’s exploitation of US capital markets that is a clear and continuing uncertainty to US economic and national security,” he replied in a statement.

However, some US investors have raised interest that such moves by Congress could close them out of high-yield investment opportunities that would be open to investors in other countries.

China may have served quick in the latest campaign by Washington to flex its muscle on audits by changing a securities law in March to ban any Chinese person from sharing any securities-related record with regulators across without the permission from the securities regulatory authority under the state council.

Though the MOU conclusions were noticeable from long before, according to industry figures, this agreement that is not legally binding does not allow the PCAOB to conduct inspections of Chinese accounting firms. It explicitly allows each side to dismiss document requests if they violate domestic law or the national interest.

“The MOU signifies a gaping hole in U.S. investor protections while presenting the structure for systemic Chinese fraud,” said Kyle Bass, a hedge fund manager and vocal critic of China. “It’s criminal that the U.S. continues to grant Chinese companies allocating trillions of dollars from U.S. investors to avoid complying with basic U.S. securities and audit rules.”

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