PCAOB Chairman Demetrios (Jim) Logothetis Discusses China Inspections at Investor Advisory Group Fall Meeting

Unsurprisingly, Juli is joining us via Zoom from an inspection in Cyprus. Somebody told me when I first joined the Board that “the sun never sets on PCAOB inspections” and Juli is living proof of that. 

As you may have now seen, I recently returned from mainland China and Hong Kong, where I spent several days meeting with regulators, market participants, and PCAOB inspectors.  

The trip was particularly meaningful to me because it marked the first time a PCAOB Chair has traveled to mainland China since Congress passed the Holding Foreign Companies Accountable Act (HFCAA) and the first time ever that a PCAOB Chairman observed a PCAOB inspection there firsthand. 

In Shanghai, I observed the PCAOB’s extraordinary inspectors at work. What I saw reinforced my confidence in both the rigor of our inspection program and the professionalism of the PCAOB staff carrying out that work. As someone with more than 40 years of experience in the audit profession, I can speak firsthand about the tough, but professional way in which our staff conducted their inspections.  

Our inspectors asked difficult questions, sought extensive documentation, and applied the same scrutiny that they apply to firms anywhere else in the world. 

I can report that the PCAOB is conducting inspections in mainland China and Hong Kong with the same level of rigor, skepticism, and independence that investors should expect. Our inspections teams were exceptionally well prepared and thorough in their work. 

In Beijing, I met with U.S. Ambassador David Perdue, Chairman Wu and Vice Chairman Liu of the China Securities Regulatory Commission (CSRC), and Vice Minister Guo of the Ministry of Finance. 

I thanked the PRC officials for their cooperation in implementing the Statement of Protocol and emphasized a point that remains fundamental: continued complete PCAOB access is essential. I also reiterated that any impairment of that access could require immediate PCAOB consideration of a new determination under the framework established by the HFCAA. 

In turn, they articulated their strong commitment to cooperation with the PCAOB on audit oversight, including PCAOB inspections and investigations in mainland China and Hong Kong.   

I also traveled to Hong Kong, where I met with leaders of the Accounting and Financial Reporting Council (AFRC) and the Securities and Futures Commission (SFC). 

Across all of these meetings, one theme was consistent: effective capital markets depend on credible financial reporting, and credible financial reporting depends on high quality audits. 

Why Access Matters 

As important as these developments have been, it is worth remembering that the HFCAA and the PCAOB's work in China and elsewhere around the world are ultimately about one thing: access. 

Everything else flows from that principle. 

If access is restricted, conditioned, delayed, or denied, the law contemplates consequences. 

If access is complete, investors are better protected. 

Investors deserve the same level of confidence whether an issuer's auditor is located in New York, London, Shanghai, Hong Kong, or anywhere else in the world.  

I also want to address a point that is sometimes misunderstood. The audit documentation reviewed by PCAOB inspectors is not the same thing as the broader universe of information within a company's public disclosures. 

The PCAOB's authority extends to audit documentation and related information necessary to inspect and investigate the auditor's work. By contrast, broader corporate disclosures fall outside the PCAOB's jurisdiction, and evidence supporting those disclosures is not regularly contained within audit workpapers. 

Those distinctions matter because they help define both what the PCAOB does and what it does not do. What we do is carefully review audit work performed by registered firms to assess whether auditors complied with applicable standards and whether the firm’s systems of quality control are functioning effectively. 

Our inspectors are highly trained professionals. They know how to identify required procedures not performed, missing documentation, incomplete files, inconsistencies in engagement records, and when audit documentation may have been altered or improperly maintained.  

When deficiencies exist, we identify them.

When violations occur, we address them. 

And the public results speak for themselves. 

The PCAOB's inspection reports on firms headquartered in mainland China and Hong Kong demonstrate that our oversight is not symbolic, and it is not softened. Inspection findings have been significant. In fact, among the first twenty inspection reports issued following implementation of the Statement of Protocol, half disclosed deficiency rates of 100 percent in the engagements reviewed. Not a single report reflected complete compliance with applicable PCAOB standards and rules. 

Those outcomes should leave little doubt about the rigor of our inspections. 

We are not pulling any punches. We do not modify our methodology based on geography. And we do not avoid engagements because they are sensitive. 

We select engagements based on risk to investors. We review the documentation we believe is necessary. And we exercise the same professional skepticism and apply the same inspection procedures everywhere. 

The measure of audit quality does not change when a firm crosses a border. 

Where We Go from Here 

Securing full access in mainland China and Hong Kong was a major milestone.  

But access alone does not eliminate risk. Markets evolve. Risks evolve. And oversight must evolve as well. 

The PCAOB continues to monitor developments that may affect investor protection, including efforts by market participants to evade scrutiny through auditor switching and other practices that avoid regulatory scrutiny. I have asked DRI staff to recommend to the Board the best ways we can stay on top of emerging risks, including those associated with unique business structures like variable interest entities (VIEs).  

We recognize that VIEs raise issues that can touch both financial reporting and audit oversight.  

We will continue to work closely with the SEC staff, sharing perspectives within our respective authorities and looking for opportunities to ensure that our oversight work is informed by the risks these structures may present to investors. 

Addressing those challenges will require continued vigilance and continued coordination among global regulators.  

We are encouraged by broader efforts across the U.S. regulatory community to address emerging cross-border risks and strengthen protections for investors. 

At the PCAOB, we are also strengthening our global posture. 

We are working with counterparts around the world to improve information sharing, identify emerging risks more quickly, and promote greater consistency in regulatory approaches where appropriate.  

In fact, earlier this month, I traveled to Tokyo for a meeting of the International Forum of Independent Audit Regulators (IFIAR) Board and to meet with our Japanese regulatory counterparts. Those conversations provided an important opportunity to discuss our work to modernize inspections, the implementation of QC 1000, the opportunities and challenges of superintelligence, and how we can continue strengthening cooperation among audit regulators.  

Global risks increasingly require global coordination.  

Whether the issue is audit quality, enforcement, technology, fraud, market manipulation, or emerging financial products, regulators cannot operate in isolation. 

At the same time, the PCAOB continues to modernize its own tools and capabilities. We are investing in technology, expanding the use of data and analytics, and looking for new ways to improve the effectiveness and efficiency of our oversight. 

Our objective is straightforward. We want investors to have confidence that audit quality is being evaluated rigorously and consistently, regardless of where an issuer or auditor is located. And we want firms to understand that the standards are the same for everyone without exception. 

Closing 

The challenges facing global capital markets are real. But so is the progress.  

Over the last several years, we have made meaningful advances in transparency, cooperation, regulatory coordination, and investor protection. That progress continues under this Board.  

The achievement of full PCAOB access in mainland China and Hong Kong demonstrates what is possible when difficult problems are addressed with persistence, clarity of purpose, and a shared recognition of the importance of strong and trustworthy capital markets. 

Much work remains ahead. But we will continue to pursue that work guided by a simple principle: investors deserve high quality audits and effective oversight so that they may have confidence in the integrity of the financial reporting system wherever they choose to invest.  

I will now pause to see if Karen [Dietrich], Juli [Ravas], Amy [Copeland McGarrity], my fellow Board Members or any of you would like to add any further comments.