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PCAOB and Chinese Regulators Agree on Audit Protocols

"On paper, the agreement signed today grants the PCAOB complete access to the audit work papers, audit personnel, and other information. . . . But the real test will be whether the words agreed to on paper translate into complete access in practice."
PCAOB Chair Erica Y. Williams
"On paper, the agreement signed today grants the PCAOB complete access to the audit work papers, audit personnel, and other information. . . . But the real test will be whether the words agreed to on paper translate into complete access in practice."
PCAOB Chair Erica Y. Williams

The Public Company Accounting Oversight Board ("PCAOB") finalized a Statement of Protocol with the Chinese Securities Regulatory Commission and the China Ministry of Finance. The protocols allow for the inspection of public accounting firms and their audits in mainland China.

Under the protocols, PCAOB will be permitted to (i) fully investigate China-based public accounting firms without interruption from the Chinese authorities, (ii) establish standards for auditors to conduct inspections and (iii) interview any person associated with the audits PCAOB investigates. PCAOB said that any final determination to allow continued listing of Chinese companies will be contingent on China's compliance with the agreement. PCAOB will be required to reassess its determinations by the end of 2022.

PCAOB Chair Erica Y. Williams said that the agreement, by its terms, ends a decade of obstruction by the People's Republic of China that has prevented PCAOB from inspecting Chinese public accounting firms and takes "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[.]" PCAOB stated that the agreement prevents the required U.S. delisting of companies that used these accounting firms, as would have been required by the Holding Foreign Companies Accountable Act (see previous coverage).

Primary Sources

  1. PCAOB Press Release: PCAOB Signs Agreement with Chinese Authorities, Taking First Step Toward Complete Access for PCAOB to Select, Inspect and Investigate in China
  2. PCAOB Fact Sheet: China Agreement
  3. SEC Chair Gary Gensler: Statement on Agreement Governing Inspections and Investigations of Audit Firms Based in China and Hong Kong
  4. SEC Commissioner Jaime Lizárraga: Statement on the PCAOB Agreement with China and Hong Kong

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Tags

Individuals
Gary Gensler , Jaime Lizárraga
Regulated Activities
Accounting and Audit
Regulated Entities
Accountants / Attorneys
Body of Law
Securities Law
Jurisdiction
US - Federal
Impacted Foreign Jurisdiction
China , Hong Kong
Organization
SEC Accounting Bodies