The decision to switch most likely stems from a US law stating that Chinese companies can be delisted if their auditing firms do not comply with US accounting standards.
Two dozen US-listed Chinese companies have switched auditors to reduce the risk of being delisted from American stock exchanges, a Nikkei Asia study shows.
Of the 174 US-listed Chinese firms with accountancies requiring inspection, 24 had switched auditors since 2022. Fifteen moved from accountants in mainland China or Hong Kong to ones in the US or Singapore.
The decision to switch most likely stems from a US law, the Holding Foreign Companies Accountable Act (HFCAA), which states that Chinese companies can be delisted if their auditing firms do not comply with US accounting standards. That law also empowers the nonprofit Public Company Accounting Oversight Board (PCAOB) to inspect the auditors of US-listed Chinese firms. The act enables their delisting if the PCAOB finds they are not compliant for three consecutive years.
As the HFCAA was implemented, some US-listed Chinese companies sought to avoid the threat of delisting by opting for auditors in the US and Singapore, which permits PCAOB inspections.
In May, the PCAOB released results from its inquiries into mainland China and Hong Kong, stating it had found “unacceptable” flaws in seven audits involving two accounting firms—KPMG Huazhen and PwC Hong Kong.
In a statement, PwC said it was “working with the PCAOB to address the issues.” Similarly, KPMG Huazhen said it “acknowledges the findings of the PCAOB following its inspection.”
Between them, KPMG Huazhen and PwC Hong Kong have audited 40% of US-listed Chinese entities.
Beijing initially withheld cooperation with the US on the matter until April last year, when it permitted the PCAOB to inspect Chinese accountancies. The China Securities Regulatory Commission scrapped a requirement that only Chinese regulators can conduct on-site audits of Chinese companies listed overseas. It subsequently allowed auditors to take audit records outside the country for inspection.
Complete audit-record inspections are critical for all US-listed mainland Chinese entities if they wish to be in compliance with the HFCAA. The combined market value of those firms currently stands at about $1.5 trillion as of June 2022. They were audited by 15 Hong Kong and mainland Chinese firms registered with the PCAOB.