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By Katanga Johnson

WASHINGTON (Reuters) –     The U.S. public co*pany accounting regulator will not accept any restrictions on its access to the audit papers of Chinese co*panies listed in New York, including where firms have been delisted, two people with knowledge of the U.S. agency’s thinking told Reuters.

Washington and Beijing are in talks to settle a long-running dispute over the auditing co*pliance of U.S.-listed Chinese firms which, if unresolved, could see more than 270 Chinese firms kicked off New York bourses.

Authorities in China have long been reluctant to let overseas regulators inspect local accounting firms, citing national security concerns.

A person familiar with the thinking of the Public co*pany Accounting Oversight Board (PCAOB), which oversees audits of U.S.-listed co*panies, said delisting Chinese co*panies would not bring Beijing in line with the U.S. rules.

The PCAOB must be able to pick who it wishes to inspect, based on risk, said the person. “If the Chinese regulators are going to restrict us to any degree, that would not allow us to achieve the mandate and we would not accept it.”

The Financial Times reported on Sunday, citing sources, that China is preparing to categorize U.S.-listed Chinese co*panies into groups based on the sensitivity of their data, in a potential concession to try to co*ply with the U.S. rules.

The China Securities Regulatory co*mission (CSRC) denied the report on Monday.

The sources declined to be identified because the discussions are private.

A PCAOB spokesman Kent Bonham said the “PCAOB must have co*plete access to audit work papers of any firm it chooses to inspect or investigate – no loopholes and no exceptions.”

“Time is of the essence as we continue working with (Chinese) authorities to reach an agreement that meets our mandate under U.S. law,” he added.

CSRC did not immediately respond to Reuters request for co*ment on Tuesday.

China has previously said that both sides are co*mitted to reaching a deal, although the United States has been more cautious on the outlook.

Gary Gensler, chair of the U.S. Securities and Exchange co*mission, which oversees the PCAOB, said this month that he was “not particularly confident” that a deal could be made.

The first source said the main sticking point relates to the level of access the PCAOB has to achieve its mandate.

“Chinese counterparts want various degrees of access, which we cannot accept. We need co*plete access.”

PCAOB inspections and investigations are retrospective, meaning audited financial statements are still subject to scrutiny even after delisting — which could take more than a year, said a second person familiar with the PCAOB’s thinking.

“A co*pany may still have SEC filing requirements even after delisting – including audited financial statements that are subject to PCAOB inspection,” this person said.

co*panies may still be required to file audited financial statements with the SEC, even if they are not listed on a U.S. exchange, if for example they have more than 300 U.S. shareholders or if the co*pany trades securities in the U.S. above a certain threshold off exchange, the second source added.

The oversight spat, which has been simmering for more than a decade, came to a head in December when the SEC finalized rules to delist Chinese co*panies under the Holding Foreign co*panies Accountable Act. It said there were 273 co*panies at risk.

In May, a PCAOB official warned that the agency would need to be able to co*plete inspections by early November 2022 to meet a deadline that could land as early as 2023.

(Additional reporting by Xie Yu)