Factbox-Highlights of the U.S.-China audit deal

© Reuters. FILE PHOTO: A trader enters the floor of the New York Stock Exchange (NYSE) in New York City, U.S. June 14, 2022. REUTERS/Brendan McDermid

By Michelle Price

WASHINGTON (Reuters) - Beijing and Washington have signed a deal in principle that would allow U.S. regulators to inspect U.S-listed Chinese company audits, potentially ending a dispute that threatened to kick 200 Chinese companies, including Alibaba (NYSE:BABA), off U.S. exchanges.

U.S. regulators have long demanded access to audit papers of Chinese companies listed in the United States, but Beijing has been reluctant to let overseas regulators inspect accounting firms, citing security concerns..

The U.S. Public Company Accounting Oversight Board (PCAOB) and the China Securities Regulatory Commission (CSRC) did not publish the full agreement on Friday, but provided highlights:

FULL ACCESS TO CHINA AUDIT INFORMATION

In principle at least, the United States secured what it has long demanded from Beijing: full access to Chinese audit papers.

The deal does not allow China to withhold or redact any information contained in audit documentation for any reason, and allows the PCAOB to take direct testimony from audit company staff in China for its investigations. The PCAOB can also transfer information to the Securities and Exchange Commission, the federal U.S. securities regulator which oversees the PCAOB.

WHAT ABOUT SENSITIVE DATA?

While China is not allowed to redact information, the CSRC may deem some data, including personally identifiable information, as "restricted" and subject to a "view only" review by a limited number of U.S. inspectors. PCAOB officials said on Friday that the regulator has a similar arrangement with other countries. Importantly, the PCAOB can still retain - subject to a special procedure - restricted data as needed, officials said.

COMPANY SELECTION

The PCAOB has sole discretion to select U.S.-listed Chinese companies for inspection. U.S. officials on Friday said selection is based on a risk assessment, such as the size of the company and the sector it operates in. They also stressed that delisting Chinese companies would not shield them from being selected. U.S. officials notified selected companies on Friday, officials said.

HONG KONG INSPECTIONS

Initial inspections will take place in the Special Administrative Region of Hong Kong, which operates under a "one country, two systems" formula of governance that until 2047 allows the financial center wide-ranging autonomy, judicial independence and other freedoms not enjoyed in mainland China.

PCAOB and SEC officials said they had selected Hong Kong because its COVID-19 protocols, in particular its quarantine rules, were more relaxed than those of China but that the U.S. can conduct inspections on mainland China in future.

PCAOB inspectors will head to Hong Kong by mid-September.

WHAT'S NEXT?

U.S. officials stressed that the deal did not mean China was in compliance with its rules. They will make that determination once U.S. investigators have completed their inspections and are satisfied China granted them the full access promised.