Auditing Chinese Companies…

**Some Chinese Companies Find Workaround to Avoid U.S. Delisting**
**Regulators in China are also working on a plan to comply with U.S. demands for full access to companies’ audit working papers**
**By Jing Yang, The Wall Street Journal, April 5, 2022**

**Several Chinese companies that face the prospect of being booted off American stock exchanges have come up with a way to keep their U.S. listings, while Beijing seeks to resolve a long-running audit standoff with Washington....**

**The Holding Foreign Companies Accountable Act came into effect last year and prohibits trading in securities of companies whose auditors cannot be inspected by the U.S. Public Company Accounting Oversight Board (PCAOB) for three years in a row. The regulator can inspect U.S.-registered accounting firms and their audit papers, which record raw data and other information that accountants have used to assess their clients’ financial performance. A company can have more than one auditor, but the principal auditor does most of the work, assumes responsibility for the work of other auditors, and signs off on the financial statements....The PCAOB, which functions as the auditor of auditors, has struggled to gain unfettered access to dozens of accounting firms in China, as domestic regulations have prevented those firms from handing over working papers to foreign regulators....**

**There are currently about 250 Chinese companies listed on U.S. exchanges with a combined market capitalization of more than $1 trillion, and the three-year countdown to delistings began with the filing of their 2021 annual reports....** [end quote]

A Chinese company that has no national security implications could choose an American company as its primary auditor to comply with U.S. regulations and be listed on U.S. stock exchanges. (The article uses the China franchise of Canadian coffee chain Tim Hortons — which is preparing to go public via a merger with a U.S.-listed blank-check firm - as an example.)

But that’s rare.

The vast majority of Chinese companies are not audited in an acceptable way for U.S. exchanges and may be delisted. Those that manufacture sensitive items or are Chinese government-owned are unlikely to allow foreigners to inspect their books.

The Nasdaq Golden Dragon index has been plunging for the past year.

Investors should check their mutual funds to see if they hold any of the Chinese stocks that may be delisted.