Congress is starting to press the Public Company Accounting Oversight Board to quit allowing unregulated Chinese audit firms to do business in U.S. capital markets.
Sen. Charles Schumer (D-N.Y.), a member of the Senate Finance Committee, appealed to PCAOB Chairman James Doty to deregister Chinese audit firms that are not complying with U.S. regulatory inspections required under Sarbanes-Oxley for all public company audit work. In his letter to Doty, Schumer says the PCAOB has waited long enough for Chinese authorities to get on board with permitting U.S. inspection of Chinese audit work relied on by U.S. investors. “Six years with no resolution on this critical issue is unacceptable, and it is time for the Board to exercise its enforcement authority against Chinese audit firms that have not submitted to independent regulatory review,” Schumer wrote.
Since Sarbanes-Oxley took effect, the PCAOB has accepted the registrations of more than 900 overseas firms that requested permission to audit financial statements of U.S. registrants. Then the board encountered roadblocks in a number of countries as it attempted to enforce the inspection requirement for all registered firms. The board has worked through agreements with several countries to establish regulatory cooperation, including Australia, Singapore, the United Kingdom, Switzerland, Norway, Japan, and more recently Taiwan and Israel. However, Chinese authorities in particular continue to bar U.S. authorities from inspecting China-based firms, citing sovereignty concerns and conflict with their own laws.
The PCAOB and the Securities and Exchange Commission sent a delegation to China in July to meet with the China Securities Regulatory Commission and the Chinese Ministry of Finance to try to work out a regulatory cooperation agreement. U.S. and Chinese authorities discussed a series of arrangements to help build understanding and cooperation, but did not strike an agreement that would allow U.S. inspection of Chinese audit firms.
Schumer acknowledges the PCAOB's efforts, including publishing lists and alerts to be transparent about the regulatory lapse, but calls on Doty to take a tougher stand. “As we have seen on other issues, years of discussions with the Chinese government generally fail to produce meaningful results,” Schumer wrote. “The Board was not created to merely alert the public to problems. Rather, the Board was set up as a watchdog to protect investors – to inspect and assess compliance with applicable securities laws to protect the interests of investors and further the public interest in the preparation of accurate audit reports. In the case of Chinese audit firms, the Board is failing to do its job.”
The PCOAB did not respond to a request for comment on the Schumer letter.