U.S. regulators have picked companies including Alibaba Group Holding Ltd. and Netease Inc. in the first batch of inspections after reaching a deal with China to end a decades-long impasse over access to audit papers of Chinese firms listed in New York.
Other firms selected include Baidu Inc., JD.com Inc. and Yum China Holdings Inc., according to two people with direct knowledge of the matter. The Public Company Accounting Oversight Board has requested to review materials from the latest financial year, one of the people said. The list is still subject to change.
A spokesperson for the PCAOB said that the watchdog does not comment on inspections.
The review, planned to take place in Hong Kong next month, comes after a breakthrough on Friday in granting U.S. inspectors access to background audit paperwork of Chinese stocks. The dispute heated up in 2020 after a U.S. law set a time frame for firms whose work papers can’t be inspected to be kicked off American stock exchanges.
The agreement announced last week was seen as a significant step forward, but conflicting messages have cast doubt on how it will be implemented. While the PCAOB said it had the sole discretion to select the firms, audit engagements and potential violations, Chinese regulators said any access to companies and working papers would be done with Chinese participation and assistance.
Logistical uncertainties also remain, including how to physically transfer the working papers across the Chinese border to Hong Kong for the U.S. to review, according to Loretta Fong, the president of the Hong Kong Institute of Certified Public Accountants.
“The industry is still exploring different possibilities to make it happen,” she said.
Hong Kong’s own audit watchdog, the Financial Reporting Council, gained the right to review audit working papers in 2019, but the deal restricted it from transferring documents or knowledge to other regulators.
Baidu and JD representatives declined to immediately comment when contacted by Bloomberg News, while Alibaba and NetEase spokespeople didn’t immediately respond to requests for comment. Yum China also didn’t immediately respond.
Some of the names of the companies slated for inspection were earlier reported by Reuters.
The first cohort of names are among the largest and most actively traded U.S.-listed Chinese firms, all of which have employed global auditors. Unlike multiple state-owned firms that are voluntarily exiting New York exchanges, they’re also privately controlled firms with powerful American investors.
While most working papers are stored electronically, audit firms are now debating how to transfer files to Hong Kong from mainland databases. Some are exploring mailing them on CDs while another option would be to unlock the Chinese cloud for access in Hong Kong, according to four partners at the so-called Big Four accounting firms who asked not to be named discussing a private matter.
Still, auditors expected some documents would need to be presented in their physical form, the partners said.
The audit firms are summoning relevant staff back to Hong Kong, preparing top management, IT and internal control teams to greet the inspection team. Partners responsible for the companies being inspected are canceling leave, said the people.
China had been reluctant to share audit papers in part due to national security concerns. But given that the current practice already dictates auditors not to include anything with national secret implications in the working papers, the risk of exposing such secrets to U.S. inspectors is minimal, the partners said.
The four include Deloitte LLP, PricewaterhouseCoopers LLP, Ernst & Young LLP and KPMG LLP.
A Deloitte spokeswoman said the firm doesn’t comment on clients or on any specific company’s matters. EY and KPMG didn’t immediately respond to emailed requests for comment. A PwC spokesperson said the firm was unable to comment on client matters.
— With assistance from Daniela Wei, Lisa Du, Jane Zhang and Lydia Beyoud