Latest Push by Chinese Firms to Avoid US Delistings Falls Short

Chinese companies are flailing in a fresh bid to avoid being booted off U.S. stock exchanges for shirking Washington’s oversight demands.

American regulators say they doubt their calls for more transparency will be met by Chinese businesses simply hiring U.S. auditors. Switching accounting firms had been seen by some companies as a way to satisfy a 2020 law that threatens to remove businesses from the New York Stock Exchange and Nasdaq if U.S. officials can’t inspect their audit work papers.

While U.S. inspectors have started reviewing those documents under a preliminary accord reached between the two governments, about 200 companies based in China and Hong Kong still face possible delisting. The pushback on the auditor switches is yet another hitch in the decades-old dispute over Beijing’s refusal to let Americans review the audit papers, a basic pillar of accessing U.S. capital markets.

“What we’re concerned about is the possibility, you might have a fact pattern where the issuer has engaged a lead auditor who is not able to actually audit a substantial portion of the consolidated operations,” Paul Munter, acting chief accountant of the Securities and Exchange Commission, said in an interview.

The skepticism from senior SEC officials like Munter and the Public Company Accounting Oversight Board could be bad news for firms like Zai Lab Ltd. and BeiGene Ltd. So far there have only been a smattering of examples of companies switching to U.S.-based auditors, but American regulators have indicated they’re concerned that others will soon follow.

The businesses have said the moves reflect their increased presence in the U.S., but the auditor swaps have been widely seen as attempts to avoid delisting. Zai Lab said in its second-quarter earnings release that hiring KPMG U.S. “was a natural progression” of its global growth. “We believe that we will be in compliance with the requirements of the Holding Foreign Companies Accountable Act,” referring to the 2020 U.S. law.

Zai Lab declined to comment. KPMG said in a statement that it carefully vets whether it can deliver quality audits under PCAOB standards whenever taking on work, but declined to discuss its new client.

BeiGene, which calls itself a global biotech company, hired Ernst & Young’s U.S. practice as its auditor this spring. Neither the company, which has administrative offices in Cambridge, Mass., nor EY responded to requests for comment.

The companies’ plans to switch audit firms predate the Aug. 26 agreement between U.S. and Chinese regulators to allow for inspections to begin. SEC Chair Gary Gensler has said that American officials will assess by December whether their access is sufficient.

Companies like Zai Lab and BeiGene are relatively small, but the audit access issues are also casting a shadow on Chinese behemoths like Alibaba Group Holding Ltd. that trade in New York.

The 2020 U.S. law set a three-year time frame for booting public companies from American markets if PCAOB inspectors can’t review their audit documents as required by the 2002 Sarbanes-Oxley Act. That legislation was passed in the wake of the Enron Corp. accounting scandal and it’s meant to prevent fraud and wrongdoing that could wipe out shareholders.

China and Hong Kong are the lone two jurisdictions worldwide that haven’t allowed the PCAOB inspections, with officials there citing national security and confidentiality concerns.

Xiaomeng Lu, an analyst at Eurasia Group, called the auditor switches a potential “gray-area workaround” that’s unlikely to win over regulators in the U.S. and China. “If large global Chinese stocks hope to maintain their listings in New York, it is better to be safe than sorry,” she said.

Neither the PCAOB nor SEC have said that companies can’t hire a lead auditor from outside their home country. Yet both regulators say there’s little room for error with accepting Chinese or Hong Kong clients.

“The PCAOB must have complete access, and there is no getting around that,” the watchdog said in a statement in response to questions about the recent auditor switches. “If a China-based company chooses to hire an audit firm located elsewhere in the world, that firm is required to cooperate with PCAOB inspections and investigations and produce work papers when requested.”

There’s also a possibility that China may view an auditor switch as an attempt to get around its own rules prohibiting firms from removing paperwork, which Beijing deems to contain sensitive data.  “As long as the firms are still ‘Chinese firms’, it is hard to bypass the regulatory radar of Chinese regulators,” said Gary Ng, senior economist for the Asia Pacific region at Natixis.

The China Securities Regulatory Commission didn’t respond to a request for comment.

Meanwhile, in the U.S., the PCAOB has signaled a growing focus on relationships between auditors and recently brought a case against one firm for relying too heavily on another. More are expected as the PCAOB ramps up policing of its rules, said Sandra Hanna, who leads the securities enforcement practice for Miller & Chevalier Chartered.

Amanda Iacone, Yiqin Shen and Lydia Beyoud report for Bloomberg News.

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