The Public Company Accounting Oversight Board voted on Dec. 15 that it is fully able to conduct inspections and investigations of Chinese audit firms.
"For the first time in history, the PCAOB has achieved complete access to inspect and investigate firms headquartered in Mainland China and Hong Kong," the board's chair, Erica Williams, announced in a press conference. "We have voted to vacate the previous determination to the contrary."
That previous determination was in keeping with the provisions of the Holding Foreign Companies Accountable Act of 2020, which requires the board to annually announce whether Chinese authorities are obstructing its access to local firms; three years of such obstruction would subject the companies audited by those firms being unable to list shares on U.S. stock markets.
"This historic access was only possible because of the legislation passed by Congress," Williams noted. "We have said continuously that access to U.S. markets is a privilege, not a right, and China received that message loud and clear."
The vote is not the end of the process, however.
"This is only the beginning of our work to inspect these firms, not the end," Williams said. "We are continuing to demand complete access, and our inspection teams are already making plans to resume regular inspections in 2023 and to pursue investigations."
She also warned that future determinations of China's compliance need not be solely on an annual basis: "We don't have to wait another year to review our current determination — should the PRC authorities obstruct our access in any way and at any point in the future, the board will act swiftly to consider the need to issue a new determination."
Preliminary results
Williams was quick to point out that the board vote only pertained to its inspectors' unfettered access to Chinese audit firms, not the quality of the firms' work.
"Today's announcement should not be misconstrued as a clean bill of health for firms in China – it only means that for the first time, we are able to fully access firms there for inspection and investigation," she said. "Is the PCAOB able to investigate and investigate firms completely at this time? The answer, after thorough investigations, is yes."
The inspection teams -- which were more than double the size of a typical team for such inspections, and were on the ground for three weeks longer than usual – chose eight engagements from KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers in Hong Kong, including some from categories like large state-owned enterprises or companies in "sensitive" industries that Chinese authorities had denied access to in the past.
"Our teams were tough and thorough, and tested PRC compliance with skepticism and rigor," Williams said.
Specifically, she noted three key criteria for complete access:
- The board had complete discretion in its choice of which firms, audit engagements and potential violations to inspect and investigate, without any input from Chinese authorities, who were not given any advance notice about the board's choices.
- Board inspectors and investigators had complete access to the audit workpapers involved, with no redactions, and they were able to retain the information they needed.
- Board staff were able to directly interview all personnel associated with the audits.
"We have been clear: There will be no loopholes and no exceptions to our complete access, and there were none," Wiliams said.
One indicator of the success of the inspections: They uncovered numerous potential deficiencies.
Because the inspection reports have not been finalized, Williams was not able to describe the specific deficiencies, but she did note that they were consistent with those the board has found in other first-time inspections in jurisdictions where it hasn't previously had access.
"This is a sign that our inspections work," she said. "Now that we have identified the deficiencies, we can work with those firms to fix those deficiencies."
"This is the beginning of the PCAOB's work to inspect firms in Mainland China and Hong Kong, not the end," she added. "We are continuing to demand access, and will immediately reconsider today's determinations should China obstruct or otherwise fail to facilitate our access, at any time. … We are right now making plans to continue our regular inspections in 2023, and if we are not given access or obstructed in any way, we will not have to wait until next year – we will make a new determination immediately."
