PCAOB says it can’t inspect firms in China, Hong Kong

The Public Company Accounting Oversight Board released a report today saying that it cannot conduct full and complete audit inspections of accounting firms headquartered in China and Hong Kong.

The report, which is required by the Holding Foreign Companies Accountable Act and carried out under a framework established by PCAOB Rule 6100, puts the blame for the board’s inability to “inspect or investigate completely” those firms on positions taken by the authorities in China.

Among other things, the report notes that Chinese authorities have said that the PCAOB can get access to audit work papers and similar documentation through cooperative agreements, but noted that those same authorities have routinely prevented or undermined the effectiveness of those kinds of agreements.

“To protect investors and to carry out the PCAOB’s mandate, our inspectors and investigators need consistent access across all jurisdictions to the audit work performed for public companies in U.S. capital markets,” said the PCAOB’s acting chair, Duane DesParte, in a statement. “We remain interested in a relationship with [Chinese] authorities that facilitates the access necessary to oversee PCAOB-registered audit firms in mainland China and Hong Kong, consistent with the robust international regulatory cooperation we experience everywhere else in the world.”

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In response to the report, the Securities and Exchange Commission noted that it would, on an annual basis, be identifying issuers whose auditors haven’t been completely inspected, which may lead to their suspension.

“Today’s announcement is a crucial step in protecting investors in the U.S. capital markets,” said SEC Chairman Gary Gensler. “The commission and the PCAOB will continue to engage with relevant foreign authorities on these matters. I hope that those authorities will, working with the PCAOB, take action that allows the PCAOB to carry out its statutory mandate. In addition, we remain committed to working with the PCAOB and our domestic and international counterparts to continue to implement the HFCAA.”

According to the PCAOB, in the 13 months leading up to Sept. 30, 2021, 15 board-registered firms in China and Hong Kong signed audit reports on 191 public companies.

Rule 6100 was proposed in May and approved by the SEC in November. It lays out the three factors the PCAOB examines to determine whether it can adequately inspect audit firms that are registered in a particular jurisdiction.