Alibaba and Yum China first in line for audit checks by US regulator

US regulators will attempt to inspect the Chinese audit files of Alibaba and Yum China next month as part of a landmark deal between Beijing and Washington, according to people familiar with the matter.

The deal, agreed on Friday, allows the US Public Company Accounting Oversight Board, America’s accounting watchdog, to vet the work of audit firms in mainland China and Hong Kong for the first time.

The agreement has laid the foundation to resolve a long-simmering dispute between the superpowers that could result in the US banning the trading on its exchanges of about 200 Chinese companies in 2024, threatening the value of about $1.4tn in their shares.

Jack Ma’s ecommerce group Alibaba is China’s most valuable overseas-listed company, with a market capitalisation of $249bn on the New York Stock Exchange. Yum China, which owns the KFC and Pizza Hut brands in China, is worth $21bn on US markets.

Alibaba is audited by PwC in Hong Kong and Yum China is audited by KPMG Huazhen in mainland China.

The Big Four accounting firms, which also include Deloitte and EY, have spent three decades building large operations in China. Together, they audit about 130 Chinese companies that are listed in the US, according to the US Securities and Exchange Commission.

As part of the US-China deal, the auditors’ work on the accounts of Alibaba and Yum China will be inspected by PCAOB officials in Hong Kong in mid-September. China’s securities regulator, the China Securities Regulatory Commission, met the Chinese arms of the Big Four firms in Beijing last week, according to people familiar with the meeting. Officials told the Chinese accountants to hand over their audit files to US regulators in Hong Kong. The inspections will not be carried out in mainland China due to its coronavirus pandemic restrictions.

The PCAOB will inspect the audits of a handful of Chinese companies initially but could examine as many as 20 in total, according to two people familiar with the matter. The regulator said it would select Chinese company audits to inspect based on risk factors such as size and sector, but it did not name the companies.

“It is hard to say whether the inspection is a good thing or not, and we will see how far the vetting goes,” said one Alibaba employee with direct knowledge of the inspection. “We will try our best to stay in the US stock market.”

The PCAOB will determine by the end of the year whether China and Hong Kong are compliant with the US Holding Foreign Companies Accountable Act, which was introduced in 2020 and requires foreign companies whose shares are traded in the US to make their audits available for inspection every three years or be banned from trading.

China has been reluctant to let US regulators inspect the work of its accounting firms over national security concerns.

US authorities have guided that the deal is only a “first step” to prevent the mass delisting of Chinese companies from US exchanges. SEC chair Gary Gensler said when it was announced on Friday that the “proof will be in the pudding”.

“This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China,” Gensler said. “If it cannot, roughly 200 China-based issuers will face prohibitions on trading of their securities in the US if they continue to use those audit firms.”

The news that Alibaba’s audit would be examined by US regulators was first reported by Reuters. Alibaba shares closed down 1 per cent in Hong Kong on Wednesday, while Yum China was down 3.3 per cent.

The PCAOB declined to comment. The CSRC did not immediately respond to a request for comment. Alibaba and Yum China did not immediately respond to comment requests.

Additional reporting by Cheng Leng in Hong Kong