August 29, 2022

China-Based Companies: PCAOB & China Regulators Reach Tentative Deal

On Friday, the PCAOB announced that it had reached an agreement with the China Securities Regulatory Commission and the PRC’s Ministry of Finance to permit the PCAOB to fully inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB announced that the deal, which is embodied in a “Statement of Protocol,” is just a first step, and this excerpt from the comments of PCAOB Chair Erica Williams suggest a healthy degree of skepticism about whether China’s regulators will honor the accord in practice:

“On paper, the agreement signed today grants the PCAOB complete access to the audit work papers, audit personnel, and other information we need to inspect and investigate any firm we choose, with no loopholes and no exceptions. But the real test will be whether the words agreed to on paper translate into complete access in practice.

Today, I directed the PCAOB inspection team to finalize their preparations to be on the ground by mid-September so we can put this agreement to the test. The Statement of Protocol grants the PCAOB complete access in three important ways:

– The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates – without consultation with, nor input from, Chinese authorities.

– Procedures are in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed.

– The PCAOB has direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.

Now we will find out whether those promises hold up.”

As Liz recently blogged, the tentative accord comes on the heels of increased activity surrounding the implementation of the Holding Foreign Companies Accountable Act, which could ultimately result in the wholesale delisting of China-based companies unless the PCAOB is provided with the kind of access to audit materials & personnel contemplated by the deal.

John Jenkins