PCAOB Announces Agreement With China On Production of Audit Work Papers – A Step Forward or Lip Service?

On May 24, 2013, the Public Company Accounting Oversight Board (“PCAOB” or the “Board”) announced that it had signed a Memorandum of Understanding (“MOU”) with Chinese securities regulators that would enable the PCAOB under certain circumstances to obtain audit work papers of China-based audit firms. The MOU is the product of a nearly two-year effort by U.S. regulators to gain access to audit records of U.S.-listed Chinese companies suspected of improper accounting practices or fraudulent financial statements.

In theory, the MOU is an important step because it establishes a framework under which the PCAOB can request and obtain audit papers previously withheld on the basis that their production would violate Chinese law. The MOU is also significant in that it explicitly permits the PCAOB to share the work papers it obtains with the SEC, subject to certain requirements. But the MOU, which is non-binding, is also limited by its own terms. For instance, Chinese regulators may refuse to produce documents in specified circumstances, including where production would violate Chinese law or run contrary to the public interest. Moreover, the MOU does not provide the PCAOB with the ability to conduct on-the-ground inspections of auditors in China, an important part of the Board’s oversight function. Like most international agreements to cooperate, the true test of the MOU’s efficacy will be not what the agreement says, but how the parties act in light of their “understanding.”

Please see full memo below for more information.

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