The Public Company Accounting Oversight Board is reportedly making progress in talks with Chinese authorities on enabling access to inspections of firms in that country that audit companies whose shares trade on the U.S. capital markets, after the Securities and Exchange Commission threatened to suspend listings of five Chinese companies.
Resistance to allowing PCAOB inspectors to inspect auditing firms in China has been a long-simmering problem, and 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 Securities and Exchange Commission released the names of five companies last week whose shares are subject to delisting: fast food provider Yum China Holdings, technology company ACM Research, biotechnology developers BeiGene and Zai Lab, and pharmaceutical maker Hutchmed.
An official at the China Securities Regulatory Commission was asked last week about the development and said the CSRC and China’s Ministry of Finance are making “positive progress” in talks with the PCAOB.
“We have taken note of this development,” said the official. “This is a step taken by the US securities regulator to implement the HFCAA and relevant rules. We have made clear our position on the implementation of the HFCAA in previous statements. We respect the actions taken by overseas regulators to enhance oversight of relevant accounting firms so as to improve the quality of financial disclosure by listed companies. However, we stand firmly against politicizing securities regulation. We have always held an open attitude and upheld the spirit of cooperation, and are willing to resolve issues related to the U.S. regulator’s inspection and investigation of PCAOB-registered accounting firms headquartered in China through regulatory cooperation, which is in line with international common practices."
"Recently, the CSRC and Ministry of Finance have been engaging with the PCAOB and made positive progress," he continued. "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 PCAOB confirmed the two sides are still in talks in a statement emailed to Accounting Today.
“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."
The board noted that such a relationship would need to be based on three core principles that govern its audit oversight:
- The ability to regularly conduct mandated inspections and investigations consistent with the Sarbanes-Oxley Act;
- The ability to select the specific engagements and potential violations to be inspected or investigated; and,
- Access to firm personnel, audit work papers free from redactions that interfere with the board's ability to perform its inspections or investigations, testimony, and other information or documents that its teams think are relevant.
"If an agreement is reached," the statement continued, "we will then proceed with our inspection and investigation activities to determine if the agreement operates as intended such that we are able to inspect and investigate completely registered public accounting firms headquartered in mainland China and Hong Kong pursuant to the statute.”
