PCAOB gains access to inspect Chinese audit firms for first time

The Public Company Accounting Oversight Board gained complete access to inspect and investigate the audit firms of Chinese companies for the first time in history, the PCAOB announced Thursday.

"This historic and unprecedented access was only possible because of the leverage Congress created by passing the Holding Foreign Companies Accountable Act," PCAOB Chairwoman Erica Y. Williams said in a news release. "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."

In December 2020, Congress passed the Holding Foreign Companies Accountable Act, establishing a 2024 deadline for the U.S. and China to reach an agreement before issuing a trading ban for companies using audit firms that refuse PCAOB inspections for three consecutive years.

American and Chinese officials signed an agreement in August allowing PCAOB officials to begin conducting inspections in Hong Kong in mid-September.

As outlined in the agreement, the PCAOB exercised sole discretion over selecting audit firms and engagements; viewed complete audit work papers with all information included; and had access to interview and take testimony from audit personnel, according to a PCAOB fact sheet.

However, U.S. officials maintain that the work is not over.

"I want to be clear: This is the beginning of our work to inspect and investigate firms in China, not the end," Ms. Williams said. "The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward. Our teams are already making plans to resume regular inspections in early 2023 and beyond, as well as continuing to pursue investigations."

SEC Chairman Gary Gensler said in a statement that "a lot of work remains to protect investors and ensure ongoing compliance."

In addition to continued access to inspections and investigations, Mr. Gensler said firms in China and Hong Kong must strengthen the quality of their audits and provide "specific and prominent disclosures about the heightened operational and legal risks that they face." This includes details about the extent of governmental ownership in a company or any participation from the Chinese Communist Party in their board of directors, Mr. Gensler added.

Ms. Williams said that PCAOB staff already identified several potential deficiencies in their inspections, but clarified that "it is not unexpected to find numerous deficiencies in jurisdictions that are being inspected for the first time."

"Today's announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong," Ms. Williams 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."