Audit watchdog proposes framework to help implement new trading ban

From WSJ: The U.S. audit watchdog has proposed a new framework that would help it implement a law that bans foreign companies from the country’s exchanges if their audits haven’t been inspected by American regulators.

The Public Company Accounting Oversight Board’s framework would help it decide whether it can review or investigate a public audit firm in certain jurisdictions, such as China or Hong Kong.

The law banning certain foreign businesses from U.S. exchanges—known as the Holding Foreign Companies Accountable Act—was signed by former President Trump in December and applies to cases in which the work of overseas auditors hasn’t been inspected by American authorities for three consecutive years. The Chinese government has long resisted inspections of Chinese-company audits.

The framework, which was presented on Thursday, would make it easier for the PCAOB to determine which audit firms outside the U.S. it cannot inspect. The Securities and Exchange Commission, which oversees the PCAOB, could then require additional disclosures from the companies audited by those firms and take other actions, for example issue a trading ban. The public has until July 12 to provide feedback on the proposal.

The PCAOB inspects more than 200 non-U. S. audit firms in over 40 jurisdictions every three years. However, it isn’t able to do so in China and Hong Kong, a big market for Big Four firms Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers. It also can’t review audit documents based in China without approval from Chinese authorities.

The collapse last year of Chinese coffee chain Luckin Coffee Inc., which was trading on the Nasdaq, shined a light on U.S. regulators’ struggles to inspect audits in China. Luckin Coffee was delisted and agreed to pay $180 million to settle regulators’ claims that it cooked its books to meet earnings targets.

The SEC wants to use the PCAOB’s data alongside other information to compile a list of businesses that are required to provide additional disclosure, for example, to demonstrate that they are not owned or controlled by a foreign government entity.

Chinese companies such as China Petroleum and Chemical Corp. and Yum China Holdings Inc. have expressed concerns about the HFCAA, saying it could hurt market values and stock prices.

The additional disclosure will create unnecessary compliance costs for companies, China Petroleum and Chemical said in an April 30 letter to the SEC.

The SEC didn’t immediately respond to a request for comment.

PwC and KPMG declined to comment. Deloitte and EY did not immediately respond to a request for comment.

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