SEC Acting Chief Accountant Warns Lead Audit Firms of Auditing Chinese Companies
Commentary by Steven Lofchie
SEC Acting Chief Accountant Paul Munter reminded newly engaged lead audit firms located outside of the People's Republic of China and Hong Kong of their obligations when auditing foreign issuers located in China or in Hong Kong.
Mr. Munter's warning was delivered in light of the recent agreement between the SEC and the Chinese regulatory authorities permitting PCAOB to conduct inspections and investigations of audit firms based in China or Hong Kong (see previous coverage). He cautioned that while the agreement is an important step, it remains to be seen whether PCAOB will in fact be permitted to investigate Chinese audit firms. He said that in response to this agreement, Chinese issuers have been naming a U.S. or other non-Chinese accounting firm as the issuer's lead auditor, suggesting that this transition was to avoid subjecting the Chinese audit firm to PCAOB oversight.
Mr. Munter said that the U.S. lead auditor could use the work of a local Chinese accounting firm, so long as the requirements to be a lead auditor are met and the lead auditor is able to achieve compliance with PCAOB standards. He warned that failure to comply with these standards may not only result in significant liability for the auditor, but also for the issuer.
Commentary
The SEC is making very clear that it intends to review the audit quality of Chinese firms with a skeptical eye, and likewise that it is likely to seek to review the work of the Chinese accounting firms on which any "lead" U.S. audit firm relies.