The announcement by US and Chinese regulators is a major breakthrough in a long-running impasse. Beijing has not allowed foreign regulators to inspect audits of Chinese companies, citing a desire to protect state secrets. The US has said it will force out more than $1 trillion of New York-listed Chinese companies if they fail to comply with US audit rules. The Accounting Firm Oversight Board, the US auditor watchdog, said on Friday it would have the power to choose the companies, audit work and potential violations it inspects and investigates, without consulting Chinese authorities. Under the agreement signed by the PCAOB, the China Securities Regulatory Commission (CSRC) and China’s finance ministry, PCAOB inspectors could be on the ground in Hong Kong by mid-September to begin inspections, the agency said . Despite the deal, US regulators were wary of the deal’s success. “Make no mistake, though: The proof will be in the pudding,” Gary Gensler, chairman of the U.S. Securities and Exchange Commission, said in a statement. “This agreement will only make sense if the PCAOB can actually fully inspect and investigate audit firms in China. “If it can’t, about 200 China-based issuers will face bans from trading their securities in the US if they continue to use these audit firms,” ​​he added. The CSRC said the agreement “establishes a framework for cooperation in accordance with the respective laws of the authorities” and “represents an important step forward by the regulatory authorities in China and the US to resolve the issue of audit supervision involving mutual interests.” The deal will include the work files of the Big Four audit firms prepared in mainland China and inspected by PCAOB officials in Hong Kong, according to people familiar with the details. Several people close to the matter cautioned that the pilot would have to go smoothly for the PCAOB to accept that China was complying with US audit disclosure rules. One of the people familiar with the matter – a senior banker close to a number of Chinese-American depositories (ADRs) – said an agreement had been reached to hold a test case before House Speaker Nancy Pelosi visited Taiwan, but the announcement was delayed due to of heightened nationalistic sentiment in China surrounding the visit. The CSRC met with the big four in Beijing on Thursday to discuss a possible compromise with the PCAOB’s audit requirements, said a second person close to the matter, a portfolio manager at a global asset manager. JPMorgan Chase held a call with clients in Asia and Hong Kong on Tuesday to discuss the status of takeover negotiations, according to a person who attended the call. A person on the call said Liu He, China’s vice president, had drafted a consultation document that would have given the PCAOB full access to Chinese audit records and that it had been shared with U.S. and Chinese regulators. A senior financier in Hong Kong, who is close to several Chinese technology groups, said the deal was “validated by auditor questions about liability” in recent weeks, amid concerns about an increase in shareholder lawsuits against US accounting firms. Since the PCAOB’s creation in 2002 following the corporate accounting scandals at Enron and WorldCom, more than 50 jurisdictions have complied with its requirements to inspect and investigate audit firms of US-listed companies. But China and Hong Kong have not complied. In 2020, Congress passed legislation that would subject Chinese and Hong Kong companies to delisting if the PCAOB could not review their audits. The companies could be banned from the US by 2024 if a control deal is not reached. The law “changed the game,” said Paul Leder, former head of the office of international affairs at the SEC, which oversees the PCAOB. “Without the threat of deletion, the Chinese authorities would never have agreed to the unrestricted access described by the PCAOB.” Gensler said the deal “marks the first time we’ve received such detailed and specific commitments from China that would allow for PCAOB inspections.” “The Chinese and [US] they jointly agreed on the need for a framework,” he added. “We were not willing to have PCAOB inspectors travel to China and Hong Kong unless there was an agreement for such a framework.” Additional reporting by Cheng Leng in Hong Kong and Adam Samson in London