FACT SHEET: CHINA AGREEMENT
On August 26, 2022, the Public Company Accounting Oversight Board (PCAOB) signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong completely, consistent with U.S law.
Three Keys to Complete Access
This is the most detailed and prescriptive agreement the PCAOB has ever reached with China. It includes three provisions that, if abided by, would grant the PCAOB complete access for the first time:
- The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates – without consultation with, nor input from, Chinese authorities.
- Procedures are in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed.
- The PCAOB has direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.
Only a First Step
- While significant, the Statement of Protocol is only a first step. The real test comes next, as the PCAOB prepares to have inspectors on the ground by mid-September and begin conducting on-site inspections and investigations of firms headquartered in mainland China and Hong Kong.
- Whether the PCAOB can make a determination that China is no longer obstructing access depends on whether China abides by this agreement and allows for full and timely access to information.
- The Holding Foreign Companies Accountable Act is clear that the PCAOB must be able to inspect and investigate “completely,” and the PCAOB will demand the complete access the law requires.
Additional Background: The PCAOB inspects and investigates registered public accounting firms in more than 50 jurisdictions around the world, consistent with its mandate under the Sarbanes-Oxley Act. But, for more than a decade, the PCAOB’s access to inspect and investigate registered public accounting firms in mainland China and Hong Kong has been obstructed.
In 2020, Congress passed the Holding Foreign Companies Accountable Act (HFCAA). Under the HFCAA, beginning with 2021, after three consecutive years of PCAOB determinations that positions taken by authorities in the People’s Republic of China (PRC) obstructed the PCAOB’s ability to inspect and investigate registered public accounting firms in mainland China and Hong Kong completely, the companies audited by those firms would be subject to a trading prohibition on U.S. markets. Such a trading prohibition would be carried out by the Securities and Exchange Commission (SEC) and would apply to companies the SEC identifies as having used registered public accounting firms in mainland China and Hong Kong for three consecutive years.
In 2021, the PCAOB made determinations that the positions taken by PRC authorities prevented the PCAOB from inspecting and investigating in mainland China and Hong Kong completely.
The PCAOB is now required to reassess its determinations by the end of 2022.
FACT SHEET: CHINA AGREEMENT