The ability of the Public Company Accounting Oversight Board (PCAOB) to inspect the work of Chinese audit firms is a ‘significant current issue’, the US Securities and Exchange Commission (SEC) has said.
While improvements have been made in regards to accessing information across jurisdictions, there are still significant issues for the PCAOB to inspect PCAOB-registered auditing firms in China (including Hong Kong-based audit firms, to the extent their audit clients have operations in mainland China) with respect to their audit work of U.S.-listed companies with operations in China.
Part of the issue is due to Chinese law which states the business books and records related to transactions and events occurring within China are required to be kept and maintained in China.
China also has laws governing the protection of state secrets and national security, which limit foreign access to China-based records and audit work papers.
As a result of these laws, the SEC and PCAOB have not had access to the records and audit work papers to an extent consistent with other jurisdictions.
The PCAOB has been working with Chinese officials and regulators to increase its access to audit work papers in China but progress has been slow and a ‘resolution remains unclear’.
The problem that may arise from this is a lack of assurance for investors in US markets and interests they own in companies that are China-based or have significant operations in China. The SEC noted that this risk is still present even if the company’s financial statements are complete, accurate and if the audit was appropriately conducted as it can still potentially increase uncertainty.
It was also suggested this could potentially allow for fraud to be hidden more effectively.
The SEC said that if information barriers persist ‘remedial actions involving US-listed companies may be necessary or appropriate’. Past actions have included companies being required to make additional disclosures and placing additional restrictions on new securities issuances.