U.S. accounting watchdog says it is able to inspect firms in China for first time

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By Chris Prentice, Xie Yu and Susan Heavey

NEW YORK/HONG KONG/WASHINGTON (Reuters) -The U.S. Public Company Accounting Oversight Board on Thursday said it has determined that it has gotten full access to inspect and investigate firms in China for the first time ever.

The announcement from the U.S. accounting watchdog removes the risk that around 200 Chinese companies, including Alibaba (NYSE:BABA), could be kicked off U.S. stock exchanges.

"For the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them,” said PCAOB Chair Erica Williams.

Shares of Alibaba were last up 1.1% on Thursday.

"The good news is there's some 200 companies that are based in China that actually have US traded ADRs that no longer face the acute threat of being kicked off US exchanges," said Art Hogan, chief market strategist at B. Riley Financial. "This falls into the category of a game changing view of Chinese companies because the threat of their delisting seems to have been eliminated."

The PCAOB, which oversees registered public accounting firms around the world, said late last year said that Chinese authorities had prevented the watchdog from completely inspecting and investigating in mainland China and Hong Kong.

Washington and Beijing reached a landmark deal in August to settle a long-running dispute over auditing compliance of U.S.-listed Chinese firms. Authorities in China have long been reluctant to let overseas regulators inspect local accounting firms, citing national security concerns.

U.S. lawmakers in 2020 agreed to legislation that would oust Chinese companies from U.S. stock exchanges unless they adhere to American auditing standards.

The deal gave PCAOB right to full access to Chinese audit working papers with no redactions, the right to take testimony from audit company staff in China and sole discretion to select what companies it inspects.

The PCAOB said it exercised sole discretion to select firms for audit and had selected two, KPMG Huazhen LLP in China and PricewaterhouseCoopers in Hong Kong.

U.S. officials had gained "good access" to all the information they requested during the seven-week inspection, Reuters reported in November.

PCAOB staff identified "numerous potential deficiencies" in their inspection work, Williams said.

"Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong," she said.

She declined to specify the types of deficiencies, but said they are in line with what the audit inspectors have seen in other jurisdictions during first-time inspections in other places.