The Public Company Accounting Oversight Board (“PCAOB”) recently announced that it has reached an agreement with Chinese authorities that would allow American regulators to inspect audit firms located in mainland China and Hong Kong. Historically, the PCAOB’s access to these audit firms has been restricted. With the 2020 passage of the Holding Foreign Companies Accountable Act and the rules that were enacted thereunder, a framework was put into place providing for potential delisting of issuers (from U.S. securities exchanges) whose financial statements have not been audited for three consecutive years by accounting firms subject to PCAOB inspection.
Under the new Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People's Republic of China:
- The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates;
- The PCAOB may interview and take testimony from audit firm personnel associated with the audits the PCAOB inspects or investigates;
- PCAOB inspectors and investigators will be permitted to review all audit workpapers without redaction, and to retain information; and
- The PCAOB can transfer the information it obtains to the SEC.
While the agreement represents a significant step in the relationship between U.S. and Chinese regulatory authorities, interested parties should monitor whether the Statement of Protocol is implemented as designed.
