PCAOB announces ‘complete access’ to audit papers of Chinese firms

The PCAOB said it vacated two 2021 determinations that it had not been able to access audit papers of companies based in China and Hong Kong, according to a new determination report.

“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,” said PCAOB Chair Erica Williams in a press release.

The HFCAA, passed by Congress in December 2020, held that companies whose audit papers were not open for inspection by the PCAOB could be delisted from U.S. exchanges after three years of noncompliance. The organization, which is overseen by the Securities and Exchange Commission, then created a process for delisting companies and had begun listing affected businesses on the SEC’s website.

“[A] lot of work remains to protect investors and ensure ongoing compliance,” cautioned SEC Chair Gary Gensler in a statement. “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.”

In August, the PCAOB announced it reached an agreement with Chinese regulators on a framework to access and inspect the audit papers of Chinese firms. The Chinese government had previously blocked PCAOB access to the audit papers of approximately 200 firms located in China and Hong Kong.

The PCAOB defined full access as having “sole discretion to select the firms, audit engagements, and potential violations it inspects and investigates” without input from Chinese government authorities. PCAOB inspectors and investigators must be able to “view complete audit work papers with all information included and to retain information as needed.” The organization must have “direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates,” it said in a fact sheet.

Like Gensler, Williams warned access is just the beginning of the process. What the PCAOB’s agents found during its inspections and investigations is a “separate question that we will address through our typical inspection and enforcement processes, which are designed to protect investors.”

She said inspectors found “numerous potential deficiencies” in the audit papers of the companies 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 are not finalized; Williams said they will be released in the new 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,” she said. “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.”