PCAOB, SEC double down on full access to audits in China

Dive Brief:

The Public Company Accounting Oversight Board (PCAOB) is negotiating an agreement with the People’s Republic of China as the audit watchdog seeks complete access to audit work papers of “any firm we choose to inspect or investigate — no loopholes and no exceptions,” PCAOB Chair Erica Williams said at a virtual event hosted by the Council on Institutional Investors last week.
“Our team must be able to go to China and test whether what’s “written on paper works in practice,” Williams said according to a release of her prepared remarks.
The PCAOB asserts that China continues to block access even as it annually inspects about 250 auditor firms and reviews 900 audits and conducts inspections in a total of 55 countries.

Dive Insight:

The PCAOB doesn’t have the authority to remove foreign companies from U.S. exchanges but a law the federal government enacted in 2020, the “Holding Foreign Companies Accountable Act,” (HFCAA), gives the SEC authority to do so if the PCAOB isn’t getting cooperation. Under the law if the PCAOB can’t inspect registered public accounting firms then companies that use those firms for three straight years face prohibitions on their stock trading.

U.S. regulators have recently taken steps to make sure Chinese companies are in compliance with U.S. auditing standards. Last year the SEC took a step toward de-listing non U.S. companies from U.S. exchanges if federal authorities can’t be sure accounting firms in uncooperative jurisdictions are following U.S. auditing standards.

Williams addressed the issue as the potential for rising political tensions between the U.S. and China has left some investors jittery. U.S. and global stocks wavered Tuesday on fears that U.S. House Speaker Nancy Pelosi’s visit to Taiwan could increase investors’ geopolitical risk outlook, according the The Wall Street Journal.

Williams’ position echoed the strong stand that Securities and Exchange Commission (SEC) chairman Gary Gensler made a day earlier when he said the SEC was not willing to have PCAOB inspectors go to China and Hong Kong unless there is an agreement on the rule that would allow the PCAOB to completely investigate.

“Going forward, will our markets include Chinese issuers? That still is up to our counterparts in China. It depends on whether they are willing to comply with the requirements of U.S. law to be able to remain in the U.S. markets,” Gensler said in prepared remarks for the Center for Audit Quality’s meeting which commemorated the 20th anniversary of the Sarbanes-Oxley report.