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Five Chinese State-Owned Businesses Plan to Delist from U.S. Exchanges in Dispute over PCAOB Inspections

Ruth Singleton
Published Date:
Aug 12, 2022


Five of the largest state-owned businesses in China announced on Friday that they will delist from U.S. stock exchanges because they don’t want to comply with inspections of their audits by the Public Company Accounting Oversight Board (PCAOB), Accounting Today reported. The companies are China Life Insurance Co., PetroChina Co., China Petroleum & Chemical Corp., Aluminum Corp. of China and Sinopec Shanghai Petrochemical Co. 

Congress passed the Holding Foreign Companies Accountable Act, and President Trump signed it into law, in December 2020. The legislation requires the Securities and Exchange Commission (SEC) to mandate that foreign companies receive audits compliant with regulations of the PCAOB if they want to remain listed on U.S. exchanges. Congress passed the legislation in response to Chinese state secret laws that limit the ability of the PCAOB to oversee audit firms in mainland China and Hong Kong. The legislation was meant to protect investors from accounting frauds and other financial malfeasance. If the public accounting firm for a Chinese-based company cannot be inspected by the PCAOB for three consecutive years, the company will be delisted from U.S. exchanges.

According to Accounting Today, negotiators have yet to come to an agreement in the face of a congressionally imposed deadline of 2024 to delist businesses that don't comply. Mainland China and Hong Kong are the only two jurisdictions worldwide that don't allow inspections by the PCAOB, with officials there claiming national security and confidentiality concerns.

Roughly 300 businesses based in China and Hong Kong—with over $2.4 trillion in market value—risk being desisted from U.S. exchanges as the Securities and Exchange Commission (SEC) increases scrutiny of the firms, Bloomberg Intelligence estimated in May. Accounting Today reported that it’s not clear whether the companies’ move to delist will smooth negotiations to break a standoff on audit inspections.

PCAOB Chair Erica Williams said earlier this month that a voluntary delisting might not keep the PCAOB from demanding to review a company's audit work papers, Bloomberg reported. The PCAOB's authority to inspect was retrospective, meaning that the PCAOB could still demand work papers from those companies even after they leave, Williams said.

"If a firm or issuer decides to delist this year, it really doesn't matter to me because I need to know if you engaged in fraud last year," Williams said, not referring to any company specifically.

On July 29, the SEC added Alibaba to a growing list of companies that could be bumped off American exchanges if the two countries fail to reach a deal. Alibabi, a provider of e-commerce services, is the largest U.S.-listed Chinese company. In response to the SEC’s announcement, Alibaba said it was seeking primary listings in Hong Kong, joining Bilibili Inc. and Zai Lab Ltd. which made the move earlier. The switch could help companies tap more Chinese investors while providing a template for other U.S.-listed Chinese firms that face delisting. 

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