Data About our China-Related Access Challenges

Positions taken by Chinese authorities impede our ability to oversee PCAOB-registered audit firms in mainland China and Hong Kong. Specifically, these positions impair our ability to conduct inspections and investigations of the audits of public companies with China-based operations and whether we will obtain access remains an open issue. This affects our ability to oversee two types of audit work on behalf of investors in U.S. capital markets:

  • Audit work performed by the principal, signing auditor—i.e., engagements for which the audit firm signs and issues an audit report for the financial statements of a public company. A firm can sign an audit report only if it has complied with PCAOB standards (e.g., participated sufficiently in the audit to assume responsibility for the entire audit engagement).
  • Referred work—i.e., work performed by an audit firm in support of an audit report for a public company that is signed and issued by a separate firm. PCAOB-registered firms that sign and issue audit reports must disclose certain other accounting firms—wherever located—that performed referred work and the proportion of hours they performed for the overall public company audit. Firms disclose this information on PCAOB Form AP, which the PCAOB makes public through our AuditorSearch database.

To provide investors and others with additional data and information regarding the nature and scope of the access restrictions we face on both types of audit work, we present below further data related to this issue.  

Overview of Affected Firms and Issuers

Seventeen PCAOB-registered firms located in mainland China and Hong Kong reported that they signed and issued audit reports for public companies with China-based operations in the eighteen months ended May 31, 2020. Collectively, these firms audit 195 public companies with a combined global market capitalization (U.S. and non-U.S. exchanges) of approximately $1.7 trillion. The ten largest of these companies have a combined market capitalization of approximately $1.3 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 U.S., Hong Kong and China, and, on a combined basis, trading value on U.S. exchanges was approximately 80%.

Distribution Across Audit Firms

The 195 audit engagements performed and signed by mainland China and Hong Kong firms are heavily concentrated in a small number of firms. As shown in the graphics below, mainland China- and Hong Kong-based firms affiliated with the four largest global audit firm networks, commonly known as the “Big 4,” perform the vast majority of these audit engagements. This is true when measured both by the number of engagements and the global market capitalization of the public companies. 

Number of Public Companies Audited by Mainland China and Hong Kong Audit Firms as of May 31, 2020

Source: Audit Analytics, Standard & Poor’s

Global Market Capitalization of Public Companies Audited by Mainland China and Hong Kong Audit Firms as of May 31, 2020

 

Source: Audit Analytics, Standard & Poor’s

Market Capitalization Concentration of Public Companies

A small number of companies comprise the vast majority of the total global market capitalization of this group of 195 public companies. We lack access to oversee the audits of these companies. The ten largest public companies audited by a firm located in mainland China or Hong Kong combine to make up 75% of the total global market capitalization of the 195 affected public companies. These ten public companies consist of five companies managed by Chinese authorities as State-Owned Enterprises (SOEs), and five companies in the technology sector, a sector that Chinese authorities have deemed to be “sensitive.” 

Comparing the Number and Global Market Capitalization of the Ten Largest Public Companies with All Others Audited by Mainland China and Hong Kong Audit Firms, as of May 31, 2020

Source: Audit Analytics, Standard & Poor’s

In total, 14 Chinese SOEs maintain listings in the U.S. All 14 of these entities use mainland China- or Hong Kong-based firms as their auditor. The global market capitalization of these 14 SOE issuers is significant: they represent 33% of the global market capitalization of all 195 public companies using mainland China- or Hong Kong-based firms.

Comparing the Number and Global Market Capitalization of the SOE Issuers to Other Public Companies Audited by Mainland China and Hong Kong Audit Firms, as of May 31, 2020

Source: Audit Analytics, Standard & Poor’s

Economic Sectors Affected

Our lack of access to oversee mainland China- and Hong Kong-based firms that serve as principal, signing auditors cuts across a variety of economic sectors. From a market capitalization perspective, the most significantly affected sectors include: consumer discretionary, communication services, energy, and financials. Using market capitalization as a measure, the graph below depicts this concentration.

Distribution of Public Companies Audited by Mainland China and Hong Kong Firms Across Economic Sectors as of May 31, 2020, expressed in Global Market Capitalization

Source: Audit Analytics, Standard & Poor’s

Geographic Diversity of Auditors Relying on China-Based Referred Work

Many auditors located outside of mainland China and Hong Kong—including firms located in the U.S., other parts of the Americas, Asia, and Europe—rely on referred work performed by mainland China- and Hong Kong-based firms for portions of multinational public company audits related to China-based operations. You can view the full list of firms that rely on such referred work and sort by jurisdiction.

Referred Work Engagement Participation by Public Company Size

For referred work engagements, the percentage of total audit hours performed by mainland China- and Hong Kong-based firms tends to be lower for audits of larger multinational public companies than for smaller multinational public companies. The charts below compare referred work engagements performed by mainland China- and Hong Kong-based firms for the larger public companies—known as “Large Accelerated Filers” under SEC rules—with the referred work engagements performed by such firms for all other public companies. They are grouped by the incremental ranges (of percentage hours performed relative to the overall group audit) reported by PCAOB-registered firms on Form AP.

As these charts show, for 95% of the audits that disclosed work performed by a firm in mainland China or Hong Kong for Large Accelerated Filers (LAF), mainland China- and Hong Kong-based firms performed 20% or fewer of the total audit hours. This represents 100 of the 105 LAF engagements. In contrast, mainland China- and Hong Kong-based firms performed more than 20% of the total audit hours (i.e., a greater share of the audit) for almost 40% of the audits of the non-Large Accelerated Filers whose audit includes the work of a mainland China- or Hong Kong-based firm. Consistent with Form AP, the data only includes public companies where the referred work was greater than 5% of total audit hours. Some principal, signing auditors report using both a mainland China- and a Hong Kong-based firm for separate referred work engagements.

Rate of Participation by Number of Referred Work Engagements for Larger Public Companies by Mainland China and Hong Kong Audit Firms

Source:  Forms AP filed for audit reports dated in the 18 months ended May 31, 2020.

Rate of Participation by Number of Referred Work Engagements for All Other by Mainland China and Hong Kong Audit Firms

Source:  Forms AP filed for audit reports dated in the 18 months ended May 31, 2020.

Concentration of Referred Work

Form AP data shows that twelve firms located in mainland China and Hong Kong perform at least 5% of the total hours for a group audit on five or more multinational public company audits. The twelve firms and the number of referred work engagements they perform is illustrated in the chart below, indicating the ranges of the portion of total audit hours performed on each.

Rate of Participation in Referred Work by Mainland China and Hong Kong Audit Firms

Source:  Forms AP filed for audit reports dated in the 18 months ended May 31, 2020.

[1] Daily trading value in the common stock for each issuer was calculated using the 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 June 1, 2019 to May 31, 2020. Hong Kong and China trading occurs in Hong Kong dollar and Chinese yuan, respectively. For purposes of comparison, Hong Kong trading values are converted from Hong Kong dollars to US dollars, and Chinese trading values are converted from Chinese yuan to US dollars using their respective daily closing exchange rates. Data source: Closing price, number of shares traded and exchange rates were obtained from S&P Capital IQ.