The US’ Public Company Accounting Oversight Board (PCAOB) has signed a statement of protocol with the China Securities Regulatory Commission and the ministry of Finance of the People’s Republic of China, 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 US law.
The statement of protocol grants the PCAOB complete access in the following ways:
- 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.
PCAOB chair Erica Williams said: “Our dedicated teams of professionals have been preparing for this moment for months, and they are ready to work swiftly, but thoroughly, to carry out our inspections and investigations. Whether our teams are able to complete that work without obstruction will inform the PCAOB’s determinations at the end of this year.”
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.
However, 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, the US 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 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 People’s Republic of China 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.