Exclusive: U.S. regulators to vet Alibaba, other Chinese firms' audits - sources

By Julie Zhu

HONG KONG (Reuters) - U.S. regulators have selected e-commerce giant Alibaba (NYSE:BABA) Group Holding Ltd and other U.S.-listed Chinese companies for audit inspections starting next month, three sources familiar with the matter said.

The move follows Friday's landmark audit deal between Beijing and Washington allowing U.S. regulators to vet accounting firms in mainland China and Hong Kong, potentially ending a long-running dispute that threatened to boot more than 200 Chinese companies from U.S. stock exchanges.

Alibaba has been notified that it is among the first batch of Chinese companies whose audits will be inspected by the U.S. audit watchdog - Public Company Accounting Oversight Board (PCAOB) - in Hong Kong, the sources told Reuters.

PwC, the accounting firm of China's biggest e-commerce company, has also been informed of the audit work inspection, said the sources, declining to be identified due to confidentiality constraints.

Alibaba did not respond to a request for comment while a PwC spokesperson said it was company policy not to comment on any client matters.

A PCAOB spokesperson said the board did not comment on inspections. The China Securities Regulatory Commission (CSRC) did not immediately respond to a request for comment.

Alibaba's U.S.-listed shares closed down nearly 3% on Tuesday after the Reuters report, having been up about 1% in pre-market trade. Its Hong Kong shares slumped more than 3% in Wednesday morning trade while tech giants listed in the city dropped nearly 2%.

U.S. regulators have for more than a decade demanded access to audit papers of U.S.-listed Chinese companies, but Beijing has been reluctant to let U.S. regulators inspect its accounting firms, citing national security concerns.

Alibaba, which went public in New York in 2014 in what was at the time the largest listing in history, is the most valuable Chinese firm listed in the United States with a market value of $248 billion as of Tuesday.

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The PCAOB said on Friday that the watchdog had notified the selected companies, without naming them, and its officials are expected to land in Hong Kong, where the inspections will take place, by mid-September.

The regulator, which oversees audits of U.S.-listed companies, would select companies based on risk factors, such as size and sector, and that no companies could expect special treatment, according to the PCAOB.

Reuters could not immediately determine how many and which other Chinese companies were in the first batch of U.S. inspections.

Founded in 1999, Alibaba counts e-commerce as its key business and has expanded into fast-growing sectors such as cloud services and internet of things in recent years. It also owns AutoNavi Holdings Ltd, a large Chinese digital mapping and navigation firm.

In July, it was added to the U.S. Securities and Exchange Commission's (SEC) list of Chinese companies that might be delisted for not complying with audit requirements.

The list now has more than 160 Chinese companies including fellow e-commerce group JD (NASDAQ:JD).com Inc and electric vehicle maker Nio (NYSE:NIO) Inc.

Current U.S. rules stipulate that Chinese companies that are not in compliance with audit working papers requests will be suspended from trading in the United States in early 2024.

Days before being added to the SEC's delisting watchlist, Alibaba said it planned to add a primary listing in Hong Kong to its New York presence, targeting investors in mainland China.

Already present on the Hong Kong bourse with a secondary listing since 2019, the tech behemoth said it expects the primary listing to be completed by the end of 2022.