U.S. Reaches Key Agreement With Chinese Regulators Over Auditing Access

The Public Company Accounting Oversight Board (PCAOB), a nonprofit corporation established by Congress to oversee the audits of public companies, recently announced a critical first step in its efforts to secure audit documents in China. The memorandum of understanding is the product of lengthy negotiations with Chinese regulators over enforcement cooperation.

As we have previously discussed on this Business Law Blog, obtaining documents in China is no easy task for the PCAOB or the Securities and Exchange Commission (SEC). The agencies have faced pushback from both U.S. listed companies based in China and Chinese affiliates of U.S. accounting firms.  The companies argue that providing requested documents would violate strict Chinese secrecy laws.

Last December, the SEC initiated administrative proceedings against the China affiliates of each of the “Big Four” accounting firms and another large U.S. accounting firm for refusing to produce audit work papers and other documents. However, its efforts in court have thus far been largely unsuccessful.

As a result, the latest diplomatic effort with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of China comes at an opportune time. “Given the global nature of capital markets, the Authorities recognize the need for cooperation to ensure compliance with, and enforcement of, their respective laws and regulations in matters related to the oversight of the auditors subject to their regulatory jurisdictions,” the agreement states.

Under the Memorandum of Understanding on Enforcement Cooperation (MOU), regulators from both countries will assist each other in obtaining materials related to investigations of auditors, which may include:

• Documents sufficient to identify all audit review or other professional services related to matters set forth in the request for assistance performed by audit firms, including, but not limited to, contracts, engagement letters, or other documents defining the nature and scope of the professional services;
• Audit work papers or other documents held by audit firms, provided that the documents relate to audit work that is subject to the regulatory jurisdictions of the PCAOB and/or the CSRC and China’s Ministry of Finance; and
• Documents sufficient to identify firms’ quality control systems including organizational structures, policies adopted and procedures established to provide assurance of compliance with professional standards.

The MOU represents a positive step forward for the PCAOB and the SEC, which will also be granted access to documents provided under the agreement. Of course, it remains to be seen how well the agreement will work in practice, particularly if it leads to widespread delisting or other sanctions against Chinese firms.

If you have any questions about the agreement or would like to discuss the legal issues involved, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work.