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US Securities and Exchange Commission

China Audit Inspection Impasse Looms Large in Big Four Lobbying

Bill Flook  Editor, Accounting and Compliance Alert

Bill Flook  Editor, Accounting and Compliance Alert

The PCAOB’s inability to inspect the audits of U.S.-listed Chinese companies loomed large in the most recent round of lobbying reports filed by Big Four audit firms. Three of the firms – Deloitte LLP, Ernst & Young LLP, and KPMG LLP – reported lobbying activity in the second quarter of 2021 on the PCAOB inspection roadblock or legislation designed to resolve it.

None of the firms, when contacted by Thomson Reuters, would elaborate on their specific lobbying goals. KPMG, in its Q2 report, reported lobbying lawmakers and the SEC on “China related legislation,” including implementation of the Holding Foreign Companies Accountable Act (HFCA), legislation signed into law late last year that threatens to delist U.S.-traded Chinese issuers after three consecutive non-inspection years.

Deloitte reported lobbying on a related bill, the Accelerating Holding Foreign Companies Accounting Act (S. 2184), a measure recently passed by the Senate to shorten the HFCA’s deadline to two years. The firm also reported lobbying on “general issues related to delisting.” (See Senate Passes Bill to Accelerate Delisting Deadline for U.S.-Listed Chinese Companies in the June 24, 2021, edition of Accounting & Compliance Alert.)

EY, in its report, listed general issues related to the Sarbanes-Oxley Act of 2002, including “PCAOB inspection inaccessibility.”

The lobbying activity underscores the delicate position the firms find themselves in as the PCAOB audit inspection impasse becomes increasingly visible amid rising U.S.-China tensions.

The HFCA would carry out what had long been considered a “nuclear option” in addressing the Chinese government’s refusal to grant U.S. regulators access to audit work papers for companies traded on U.S. exchanges, resulting in ongoing Sarbanes-Oxley violations for those companies.

Both the SEC and PCAOB have begun implementation of the law, with the latter in May issuing a proposal in PCAOB Release No. 2021-001Proposed Rule Governing Board Determinations Under the Holding Foreign Companies Accountable Act. The board is proposing to add new Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act, which would establish a framework for the board to determine it is unable to inspect a public accounting firm in a foreign jurisdiction due to a position taken by that country’s government. (PCAOB Seeks Comment on Proposed Framework to Determine Audit Firms it Cannot Fully Inspect or Investigate in the May 14, 2021, edition of ACA

EY was the only of the Big Four firms to file a comment letter to the PCAOB on Release No. 2021-001. In its short July 1 letter, the firm, among other suggestions, urged the board to take steps to safeguard confidential information and provide firms with non-public advance notice on the PCAOB’s preliminary determinations.

In addition to the delisting threat, the HFA Act also requires the companies to establish they are not owned or controlled by a foreign government, among other disclosure requirements. The SEC in late March issued interim final rules and request for comment in Release No. 34-91364Holding Foreign Companies Accountable Act Disclosure that address the disclosure portions of the law. (See SEC Starts to Implement Rules to Address Chinese Company Audit Inspections in the March 25, 2021, edition of ACA.)

 

This article originally appeared in the July 26, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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