China-Related Access Challenges

The Sarbanes-Oxley Act and the PCAOB's related rules impose obligations—consistently and in the same manner—on all PCAOB-registered firms that elect to perform audit work for public companies. Those obligations do not change based on the location of the firm or the public company being audited. Those obligations include providing complete and timely access for PCAOB inspections and investigations, bedrock functions of the PCAOB's statutory mandate and mission.

We remain concerned about our lack of access in China and will continue to pursue available options to support the interests of investors and the public interest through the preparation of informative, accurate, and independent audit reports.

We work collaboratively with audit regulators in other jurisdictions. To build those collaborative, working relationships, we have accommodated the specific legal requirements of individual jurisdictions. We have done so, however, without altering core principles fundamental to our statutory mandate and without sacrificing investor protection. In jurisdictions where PCAOB-registered audit firms operate, we have, either directly or together with other regulators, established arrangements that implement these core principles:

  1. the ability to conduct inspections and investigations consistent with our mandate;
  2. the ability to select the audit work and potential violations to be examined; and
  3. access to firm personnel, audit work papers, and other information or documents deemed relevant by our teams.

We—and therefore investors—have benefited from our international counterparts' cooperation on each of these principles.

Audits in Mainland China and Hong Kong

In the twelve months ended September 30, 2019, 17 PCAOB-registered firms in mainland China and Hong Kong signed audit reports for 179 public companies with a combined global market capitalization (U.S. and non-U.S. exchanges) of approximately $1.6 trillion. The ten largest of these companies have a combined market capitalization of approximately $1.2 trillion. It is not possible to estimate the exposure of U.S. institutional and retail investors to these companies with precision for various reasons, including because U.S. and non-U.S. investors may gain exposure to these companies through U.S. and non-U.S. transactions and holdings. As a reference point, we note that, for the ten largest of these companies, the average value of shares traded[1] for each company on U.S. exchanges ranged from approximately 3% to 100% of the combined average value of shares traded in the US, Hong Kong and China, and, on a combined basis, trading value on U.S. exchanges was approximately 85%. In addition, certain Chinese and Hong Kong firms perform audit work, commonly known as referred work, related to the mainland-based operations of other public companies whose principal, signing auditor is outside of China.

The PCAOB spent significant time and resources negotiating a Memorandum of Understanding (MOU) with the Chinese authorities for enforcement cooperation. Unfortunately, since signing the MOU in 2013, Chinese cooperation has not been sufficient for the PCAOB to obtain timely access to relevant documents and testimony necessary to carry out our mission consistent with the core principles identified above, nor have consultations undertaken through the MOU resulted in improvements.

We continue to address these issues with Chinese regulators, and whether we will obtain equivalent access remains an open issue.

We encourage investors and others to review the following links:

[1] Daily trading value was calculated using the daily closing price multiplied by the number of shares traded that day on each exchange where a company’s shares are listed. Average daily trading value includes daily trading values from January 2, 2019 to September 30, 2019. Hong Kong and China trading occurs in Hong Kong dollar and Chinese yuan, respectively. For purposes of comparison, Hong Kong trading volumes are converted into US dollars at a 7.84 HK$/US$ exchange rate, and Chinese trading volumes are converted into US dollars at a 7.15 CNY/US$ exchange rate. Data source: Closing price, number of shares traded and exchange rates were obtained from Yahoo Finance.