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PCAOB and Chinese Authorities Reach Agreement on Audit Inspections

S.J. Steinhardt
Published Date:
Aug 29, 2022


The Public Company Accounting Oversight Board (PCAOB) has achieved a breakthrough in its efforts to audit the financial statements of public Chinese companies trading in U.S. capital markets, Accounting Today reported, but the board cautioned that it still has a way to go before achieving full transparency.

The deal signed on Friday with the China Securities Regulatory Commission and the country’s Finance Ministry allows PCAOB inspectors to enter China and Hong Kong to inspect audit firms and work papers, after the two countries sparred over the issue for roughly 15 years. The ongoing spats came to a head in 2020, when the Holding Foreign Companies Accountable Act was enacted, authorizing the SEC to delist overseas companies if they prohibited PCAOB inspections for three consecutive years. Five Chinese companies pre-emptively delisted themselves two weeks ago.

A previous pilot program for joint inspections ended in 2016 when Chinese authorities prevented PCAOB inspectors from conducting full, unredacted reviews of audits. Currently, China and Hong Kong are the only jurisdictions in the world that do not allow PCAOB inspections. 

As a result of this agreement, American officials plan to start work on site in Hong Kong by the middle of next month.

News of the agreement sparked a rise in U.S. shares in Chinese companies on Friday, Accounting Today reported, but top securities officials still warned that this is not the end of the long-running dispute, which centered on China’s concerns over national security and confidentiality.

"We have this unprecedented arrangement signed this morning, but we still need to see over the next several months whether there will be compliance," Securities and Exchange Commission Chair Gary Gensler told Bloomberg Television, adding that a full assessment of needed access will come in December. 

"The PCAOB has been working to execute our mandate under the law as part of our ongoing efforts," PCAOB Chair Erica Williams said during a press conference on Friday. "This morning, the PCAOB signed a statement of protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People's Republic of China—the first step toward opening access for the PCAOB to inspect and investigate completely registered public accounting firms in mainland China and Hong Kong. On paper, the agreement signed today grants the PCAOB complete access to the audit work papers, audit personnel and other information."

Williams added, "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 and practice. Today I directed the PCAOB inspections team to finalize their preparations to be on the ground by mid-September so we can put this agreement to the test." In a separate interview with Bloomberg Television Williams emphasized that "(t)here are no special arrangements with China.” 

“This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China,” Gensler said in a statement. “If it cannot, roughly 200 China-based issuers will face prohibitions on trading of their securities in the U.S. if they continue to use those audit firms.”

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