The Securities and Exchange Commission (SEC) has warned American auditors of Chinese public companies that they must meet their responsibilities as lead auditors, Accounting Today and others reported. That means fully vetting these companies before engaging them and ensuring that the companies' management teams as well as their prior reviewers will be able to provide all necessary information.

The warning, from SEC Acting Chief Accountant Paul Munter, came as more than 200 U.S.-listed Chinese companies face delisting from U.S. stock exchanges in 2024 under the Holding Foreign Companies Accountable Act. That law, enacted at the end of 2020, bars U.S. exchanges from trading in companies whose auditors won't submit to inspections by the Public Company Accounting Oversight Board (PCAOB) for three consecutive years. It gives the PCAOB  “the responsibility for determining that it is unable to inspect or investigate completely a registered public accounting firm or a branch or office of such a firm because of a position taken by an authority in a foreign jurisdiction.” 

Many Chinese companies with multinational operations have attempted to sidestep the law’s requirements by switching to U.S.-based accounting firms, The Wall Street Journal reported. These companies attempt to claim that they meet the mandated legal and audit requirements by engaging these firms as lead auditors. 

"Recently, we have observed instances of foreign issuers—especially foreign issuers located in the People’s Republic of China ('China') or in Hong Kong—changing their lead auditor from a local registered public accounting firm to a registered public accounting firm located either in the U.S. or elsewhere, generally within the same network," Munter said. "Such arrangements pose special challenges that raise questions about whether the newly engaged registered public accounting firms—whether located in the U.S. or elsewhere—will be able to satisfy their responsibilities to serve as the lead auditor."

He added, "We caution registered public accounting firms that all audit engagements entail significant requirements and responsibilities, consideration of which should take place prior to an accounting firm’s acceptance of a client or a specific engagement."

Two weeks ago, the PCAOB signed an agreement with the China Securities Regulatory Commission and the Chinese Finance Ministry to allow PCAOB inspectors to enter China and Hong Kong to inspect audit firms and work papers. The two countries had sparred over the issue for roughly 15 years.