China and the United States signed an agreement on cooperation in audit supervision, which is expected to solve the problem of passive delisting of Chinese concept stocks from the United States

The China Securities Regulatory Commission (CSRC) and the Ministry of Finance, PRC signed an agreement on audit supervision cooperation with the Public Company Accounting Oversight Board (PCAOB) on August 26, 2022, and will launch relevant cooperation in the near future.

The cooperation agreement is based on laws and regulations of the two countries, respects common international practices, and follows the principle of reciprocity and mutual benefit. It clearly stipulates that the two sides will conduct regulatory inspection and investigation activities in cooperation with relevant accounting firms, forming a cooperation framework that meets the regulatory and regulatory requirements of the two sides.

The signing of the cooperation agreement is an important step taken by Chinese and US regulators to address the common concern of audit supervision cooperation, and lays a foundation for active, professional and pragmatic cooperation between the two sides in the next stage. Promoting cross-border audit supervision cooperation in accordance with the law will help further improve the quality of accounting firms, protect the legitimate rights and interests of investors, and create a favorable international regulatory environment for enterprises to carry out cross-border listing activities in accordance with the law.

1. Q: What is the significance of the China-Us Audit Supervision Cooperation Agreement?

A: Signed audit supervision cooperation agreement, China and the United States is both sides to deal with the problem of the audit supervision cooperation an important step, for the two sides in accordance with the law of mutual supervision within the scope of the accounting firm to carry out the daily inspection and law enforcement cooperation established regulatory cooperation mechanism, the two sides for the next step in in accordance with their respective laws and regulatory requirements under the premise of equality and efficient cooperation laid a solid foundation, In line with the international practice of capital market supervision and cooperation. The cooperation between China and the United States on audit supervision is of positive significance to improving the practice quality of accounting firms, protecting the legitimate rights and interests of investors, and creating a favorable regulatory environment for enterprises to carry out cross-border listing activities in accordance with laws and regulations.

2. Q: What is the main content of the China-Us Audit Supervision Cooperation agreement?

A: On the basis of the Memorandum of Understanding on law enforcement Cooperation in 2013 and the Memorandum of Cooperation on Pilot Inspection in 2016, the agreement on cooperation on Audit supervision between China and the US was reached after repeated consultations in accordance with domestic laws, regulations and regulatory requirements of the two sides, with reference to relevant international practices, and after summarizing previous cooperation experience. The cooperation agreement mainly makes specific arrangements for both parties to cooperate with relevant accounting firms to carry out routine inspection and law enforcement investigation, and agrees on important matters such as the purpose, scope, form, use of information and protection of specific data.

The cooperation agreement includes the following key contents: First, establish the principle of reciprocity. The terms of this agreement shall be equally binding upon both parties. Both China and the United States may, in accordance with their legal duties, conduct inspections and investigations on the relevant firms within the jurisdiction of the other party, and the requested party shall do its best to provide full assistance within the scope permitted by law. Second, define the scope of cooperation. The scope of the cooperation agreement includes assisting the other party in conducting inspections and investigations of the relevant firms. Among them, the scope of Chinese assistance also involves some of the Hong Kong firms that provide audit services for China Concept Shares and have audit papers stored in the mainland. Third, we need to identify ways of collaboration. The two sides will communicate and coordinate the plan of inspection and investigation activities in advance. The US side shall obtain audit papers and other documents from the Chinese regulatory authorities and conduct interviews and inquiries with the participation and assistance of the Chinese side.

3. Q: What is the purpose of cross-border audit supervision cooperation?

A: When companies issue securities and go public in the capital market, they should regularly release financial reports to provide information for investors to make informed decisions. Laws and regulations of all countries require accounting firms to audit relevant financial reports, and require regulators to supervise relevant accounting firms to ensure that they perform their duties as "gatekeepers" in accordance with laws and regulations, improve the quality of information disclosure in the capital market, and safeguard the legitimate rights and interests of investors.

In the case of cross-border listing of enterprises, local accounting firms providing audit services for these enterprises generally need to be registered in the place of listing and subject to the supervision of the regulatory authorities in the place of listing. Since these firms may be spread around the world, regulators in the listed countries must establish cooperation mechanisms with the local regulators of the relevant firms to conduct cross-border regulatory cooperation, which is the common practice in global capital markets. Without effective cooperation in cross-border audit supervision, it will be difficult to make sure that the audit work of relevant firms meets the regulatory requirements, and the quality of financial statements of relevant listed companies will lack a layer of guarantee, which will lead to questions from investors. Even according to the laws and regulations of the listed place, the securities of relevant companies cannot be listed and traded there.

With the gradual deepening of two-way opening-up of China's capital market, cross-border listing of enterprises and cross-border exhibition of accounting firms are increasingly frequent. At present, there are more than 200 Chinese companies listed in the US capital market, and more than 30 Chinese domestic accounting firms registered with PCAOB, which can provide audit services for Chinese companies listed in the US. In order to fulfill the audit and supervision duties of the above firms, PCAOB needs to establish cooperative relations with Chinese regulatory authorities and implement cross-border regulatory cooperation. Similarly, if Chinese regulators need to conduct audit supervision on the US accounting firms under their supervision, they should do so through the regulatory cooperation mechanism. This is international practice and both sides need this mechanism. Keeping Chinese concept stocks listed in the US is beneficial to investors, beneficial to listed companies and beneficial to both China and the US. It is a win-win institutional arrangement. This is an important basis for both sides to be able to sit down and negotiate and reach an agreement.

4. Q: What is the role of audit working papers in cross-border audit supervision cooperation?

A: The supervision of accounting firms inevitably involves audit working papers. Take daily inspection as an example. In addition to checking the internal control system of accounting firms, regulators also need to check the audit working papers of some listed companies to check the quality of the firm's work. Audit working papers are the "work records" made by the firm in the process of carrying out the audit, such as the audit plan made, the audit procedures implemented, the relevant audit evidence obtained, and the audit conclusions drawn. The main function of audit working papers is to record whether the auditor has dutifully verified the accuracy of corporate income and expenditure and other financial information in accordance with auditing standards. Therefore, it does not generally include sensitive information such as state secrets, personal privacy or underlying data of enterprises.

It should be noted that the direct object of audit supervision is accounting firms, rather than the listed companies they audit. From the international practice of cross-border audit supervision cooperation, the regulatory authorities of listed places generally select some accounting firms for inspection every year, and select representative or potential audit quality risk audit items from the listed companies audited by the inspected firms for verification, so as to evaluate the audit quality of the firms. The same is true for Sino-US audit supervision cooperation. It is not necessary to inspect all audit items of US-listed companies every year.

5. Q: Under the framework of the cooperation agreement, if the audit working papers contain some sensitive information, can they be protected as necessary?

A: In recent years, Chinese data security law, personal information protection law and other information security related laws and regulations have been implemented, the information security responsibilities of relevant market subjects are more clear, the operation is more rules-based. Companies, whether listed or not, have the obligation to strictly abide by national laws and regulations.

Recently the China Securities Regulatory Commission and other departments to perfect the listed abroad relevant confidentiality and archives management rules, to standardize the audit work papers put forward clear requirements, information security management, further implement the main body of the listed company information security responsibility, at the same time for the listed companies and accounting firms classified disposal in accordance with the rules in accordance with the sensitive information provides more specialized and executable instructions, Help to meet the requirements of accounting audit under the premise of doing a good job of the manuscript preparation, and protect the relevant information security according to law.

The China-Us Cooperation Agreement on Audit Supervision includes the inspection and investigation activities of relevant accounting firms under the cooperation framework. The two sides will fully communicate and coordinate in advance, and the US side will obtain and provide audit working papers and other documents to be viewed through the assistance of the Chinese regulatory authorities. At the same time, the cooperation agreement makes clear provisions on the processing and use of sensitive information that may be involved in the audit supervision cooperation, and sets up special processing procedures for specific data such as personal information, which provides a feasible path for both parties to fulfill their statutory supervision responsibilities while protecting the security of relevant information.

6. Q: Does the agreement on Sino-US audit supervision mean that the risk of delisting from the US has been removed?

A: The signing of the China-Us Agreement on Cooperation in Audit supervision marks a key step by the two sides to resolve the issue of audit supervision of China Concept Shares through enhanced cooperation, which is in line with market expectations and expectations. In the next step, both parties will carry out daily inspection and investigation activities on relevant accounting firms in accordance with the cooperation agreement, and make an objective assessment of the cooperation effect. If the follow-up cooperation can meet the respective regulatory needs, it is expected to solve the audit supervision problems of China Concept stocks, so as to avoid passive delisting from the United States. We look forward to actively promoting cooperation with the US regulatory authorities in a professional and pragmatic manner and working together to achieve positive results.