The Public Company Accounting Oversight Board said Thursday that it is still meeting with Chinese authorities to discuss the ability to inspect auditing firms in that country and said reports about an agreement were “premature.”
Earlier this month, an official at the China Securities Regulatory Commission said it and China’s Ministry of Finance were in talks with the PCAOB and were making “positive progress.”
"We believe the two sides will be able to jointly work out cooperation arrangements that comply with the legal and regulatory requirements of both countries in an expedited manner,” the official said in an answer to a reporter who had asked about the Securities and Exchange Commission’s announcement that at least five Chinese companies faced possible delisting from U.S. capital markets.
In 2020, Congress passed the Holding Foreign Companies Accountable Act, which requires issuers to prove they’re not owned or controlled by a foreign government, such as China. They must make the certification if the PCAOB is unable to audit specified reports because the issuer has retained a foreign accounting firm not subject to inspection by the board. If the PCAOB is unable to inspect the firm for three years in a row, its securities are banned from trading on a U.S. exchange or through other methods.
The PCAOB had confirmed the ongoing talks with the People’s Republic of China to Accounting Today earlier this month (
“The PCAOB regularly engages with regulators outside the United States to enable the PCAOB to carry out its mandate and meet its statutory obligations,” said the PCAOB. “Guided by our mandate, we are actively engaged and have been meeting with PRC authorities in an effort to reach an agreement that would allow the PCAOB access to PCAOB-registered firms in mainland China and Hong Kong, consistent with the cooperation we receive everywhere else in the world. We remain interested in a relationship with PRC authorities that facilitates that access.”
However, the talks appear to have hit yet another snag in the negotiations, which have been going on for years. On Thursday, a PCAOB spokesman clarified that it was premature to speculate the two had reached a final agreement.
“Speculation about a final agreement between the PCAOB and the People’s Republic of China (PRC) authorities on PCAOB access to audit firms headquartered in China and Hong Kong is premature,” said the PCAOB. “We continue to meet and engage with PRC authorities in an effort to achieve a cooperative agreement that provides the PCAOB with the access required to inspect and investigate completely auditors headquartered in mainland China and Hong Kong. We appreciate the engagement of the Chinese Securities Regulatory Commission and Ministry of Finance to work through several important threshold issues, though it remains unclear whether the PRC government, as a whole, will agree to permit and facilitate the access we require.”
In the past, Chinese authorities have allowed limited access to the PCAOB. In 2012, the PCAOB reached a tentative agreement to begin observing Chinese regulatory authorities during inspections of auditing firms in China as a kind of “trust-building exercise.” PCAOB inspectors would be able to observe the Chinese authorities conducting their own audit oversight activities and the Chinese could observe the PCAOB at work, according to then board member Lewis Ferguson (
However, talks broke down in 2015 and the PCAOB’s then chairman, James Doty, told a conference that the board hit a roadblock after a tentative agreement had been reached on a pilot program for inspections earlier that year (
The roadblocks appear to be continuing. “The PCAOB’s requirements are straightforward, including the ability to inspect or investigate completely any audit engagement within our mandate, regardless of the issuer’s location or industry,” said the board on Thursday. “This requires full access to audit work papers, firm personnel, and any other relevant information related to such audit engagements. Restrictions on PCAOB access to firms that have registered voluntarily with the PCAOB and that have chosen to perform required audits of companies that avail themselves of U.S. capital markets and are subject to U.S. federal securities laws deprive investors and the public of the benefits of the protections resulting from the work the PCAOB performs on behalf of investors.”
The China Securities Regulatory Commission reportedly still wants to retain the ability to withhold sensitive data from inspection by the PCAOB, according to
“While we will continue our work to find practical solutions to address the concerns of PRC authorities, ultimately, full access to relevant audit documentation is necessary to carry out our mandate on behalf of investors,” said the PCAOB. “This is not negotiable, even with respect to issuers in sensitive industries.”
The PCAOB noted that it has been able to work out inspection arrangements with other countries without sacrificing confidentiality.
“The Sarbanes-Oxley Act provides strong confidentiality protections and creates a privilege for any information received or prepared by the PCAOB in connection with an inspection or investigation,” said the PCAOB. “The strength of these protections has provided a strong foundation for cross-border cooperation with other audit regulators around the world, including full access to the documentation of the work and conclusions of auditors under inspection or investigation.”
Even if an agreement is reached, Chinese companies could still face delisting.
“It is important to note that reaching an agreement, while an important and necessary first step, will not alone satisfy the requirements of the HFCAA,” said the PCAOB. “If an agreement is reached, we will then proceed with our inspection and investigation activities to determine if the agreement operates as intended such that we actually are able to inspect and investigate completely, in the long term, in mainland China and Hong Kong. An agreement without successful execution will not satisfy U.S. law.”
The PCAOB insisted that it needed to have the ability to inspect auditing firms no matter where they’re located.
“The PCAOB’s mandate includes overseeing the audits of public companies and SEC-registered brokers and dealers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports,” said the PCAOB. “Public companies that have chosen to avail themselves of the U.S. capital markets are required to be audited by audit firms registered with the PCAOB. The PCAOB must be able to inspect and investigate these audit firms completely, regardless of where the audit firms or the public companies they audit are located. All firms auditing public companies must play by the same rules.”
