PCAOB announces "complete access" to Chinese company audit documents

In order to prevent the delisting of hundreds of Chinese public companies from American markets, the Public Company Accounting Oversight Board (PCAOB) stated on Thursday that it has been granted "complete access to inspect and investigate" audit firms in China and Hong Kong.

According to a new decision report, the PCAOB said it vacated two 2021 determinations that it had not been able to access audit materials of businesses with headquarters in China and Hong Kong.

"This historic and unprecedented access was only possible because of the leverage Congress created by passing the Holding Foreign Companies Accountable Act (HFCAA). Congress sent a clear message with that legislation that access to U.S. capital markets is a privilege and not a right, and China received that message loud and clear," according to PCAOB Chair Erica Williams in a press release.

The HFCAA, which Congress approved in December 2020, stipulated that after three years of noncompliance, corporations whose audit papers were not available for the PCAOB to review might be delisted from U.S. exchanges. The Securities and Exchange Commission-regulated entity then established a procedure for delisting corporations and had started listing the affected companies on the SEC website.

SEC Chair Gary Gensler issued a statement warning that "[a] lot of work remains to protect investors and ensure ongoing compliance. First, the PCAOB must have continued access for complete inspections and investigations in 2023 and beyond. Second, registered public accounting firms headquartered in China and Hong Kong must work to strengthen audit quality. Third, Chinese-based issuers that access U.S. capital markets must provide specific and prominent disclosures about the heightened operational and legal risks that they face."

The PCAOB said in August that it had agreed a framework with Chinese regulators for gaining access to and reviewing the audit records of Chinese companies. Previously, the Chinese government has denied PCAOB access to the audit records of some 200 Chinese and Hong Kong-based companies.

Full access, as defined by the PCAOB, is the ability to choose the firms, audit engagements, and any violations independently of Chinese government authorities. "View complete audit work papers with all information included and to retain information as needed" are requirements for PCAOB inspectors and investigators. In an information sheet, the company stated that it needed "direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates."

Williams, like Gensler, cautioned that access was only the first step. What the agents of the PCAOB discovered during their inspections and investigations is a "separate question that we will address through our customary inspection and enforcement processes, which are designed to protect investors."

In the audit documents of the companies, she said that inspectors discovered "numerous potential deficiencies" that are "consistent with the types and number of findings the PCAOB has encountered in other first-time inspections around the world."

The inspection reports have not been finalized; according to Williams, they will be made public next year.

"Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong," the official stated. "It is a recognition that, for the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them. We arrived at today’s decision only after thoroughly verifying China’s compliance."

By fLEXI tEAM