The PCAOB on December 16, 2021, issued a report relaying to the SEC its determinations that the board is unable to inspect or investigate completely registered public accounting firms in mainland China and Hong Kong due to positions taken by Chinese authorities. The report, issued under Rule 6100, lists dozens of accounting firms based in mainland China and Hong Kong subject to the determinations.
The move represents another step in implementation of the Holding Foreign Companies Accountable Act (HFCA Act), a measure signed into law late last year that addresses the Chinese government’s ongoing refusal to allow PCAOB inspection of those auditors for companies listed in the U.S., resulting in ongoing violations of the Sarbanes-Oxley Act of 2002. The HFCA Act would ban trading of those companies after three consecutive non-inspection years.
SEC Chair Gary Gensler, in a statement on the PCAOB announcement, called it a “crucial step in protecting investors in the U.S. capital markets,” and noted that the SEC will, based on the annual determinations by the PCAOB, identify companies that have used non-inspected auditors “and thus are at risk of such suspensions in the future.”
“The Commission and the PCAOB will continue to engage with relevant foreign authorities on these matters,” Gensler said. “I hope that those authorities will, working with the PCAOB, take action that allows the PCAOB to carry out its statutory mandate. In addition, we remain committed to working with the PCAOB and our domestic and international counterparts to continue to implement the HFCAA.”
The report comes more than a month after the SEC issued a final order in Release No. 34-93527, Order Granting Approval of Proposed Rule Governing Board Determinations Under the Holding Foreign Companies Accountable Act approving the PCAOB’s framework for making the determinations. (See PCAOB Rule to Determine Auditors it Cannot Inspect is Approved as SEC Official Stresses Ability to Inspect ‘Completely’ in the November 8, 2021, edition of Accounting & Compliance Alert.)
The PCAOB in September published that rule in Release No. 2021-004, Rule Governing Board Determinations Under the Holding Foreign Companies Accountable Act. The board adopted Rule 6100, which spells out three factors the PCAOB would use in its assessment on whether positions by foreign authorities impair “the Board’s ability to execute its statutory mandate with respect to inspections or investigations” of the firms.
Those factors are: “the Board’s ability to select engagements, audit areas, and potential violations to be reviewed or investigated;” “the Board’s timely access to, and the ability to retain and use, any document or information (including through conducting interviews and testimony) in the possession, custody, or control of the firm(s) or any associated persons thereof that the Board considers relevant to an inspection or investigation; and “the Board’s ability to conduct inspections and investigations in a manner consistent with the provisions of the Act and the Rules of the Board, as interpreted and applied by the Board.”
The PCAOB, in its December 16 report, detailed a lengthy and unsuccessful process of negotiating with People’s Republic of China (PRC) authorities over inspections and investigations.
“PRC authorities assert that they must review audit work papers and related information before the PCAOB may access them during an inspection or investigation and that such access can be provided only under a cooperative agreement,” the report stated. “Facing similar legal requirements in other jurisdictions, the PCAOB, over the course of more than a decade, has entered into bilateral agreements with more than 20 foreign authorities and has utilized cooperative arrangements to fulfill its inspection and investigation mandates without compromising U.S. statutory requirements. Yet to date, PRC authorities persistently have taken positions that prevent the finalization of or performance under cooperative agreements.”
In a statement accompanying the release of the HFCA Act determination report, Duane DesParte, acting PCAOB chair, said that “we remain interested in a relationship with PRC authorities that facilitates the access necessary to oversee PCAOB-registered audit firms in mainland China and Hong Kong, consistent with the robust international regulatory cooperation we experience everywhere else in the world.”
This article originally appeared in the December 20, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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