PCAOB Signs Agreement with Chinese Authorities, Taking First Step Toward Complete Access for PCAOB to Select, Inspect and Investigate in China

Chair Williams underscores agreement is just first step, says PCAOB must now test it before making December determination

Public Company Accounting Oversight Board (PCAOB) Chair Erica Y. Williams released the following statement today after the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China – the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong completely, consistent with U.S. law. 

From Chair Williams:

“The U.S. Congress sent a strong message with the passage of the Holding Foreign Companies Accountable Act that access to the U.S. capital markets is a privilege, not a right.

“The PCAOB has been working to execute our mandate under the law.

“As part of our ongoing efforts, this morning, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China – the first step toward opening access for the PCAOB to inspect and investigate completely registered public accounting firms in mainland China and Hong Kong.

“On paper, the agreement signed today grants the PCAOB complete access to the audit work papers, audit personnel, and other information we need to inspect and investigate any firm we choose, with no loopholes and no exceptions. But the real test will be whether the words agreed to on paper translate into complete access in practice.

“Today, I directed the PCAOB inspection team to finalize their preparations to be on the ground by mid-September so we can put this agreement to the test.

“The Statement of Protocol grants the PCAOB complete access in three important ways:

1. The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates – without consultation with, nor input from, Chinese authorities.
2. Procedures are in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed.
3. The PCAOB has direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.

“Now we will find out whether those promises hold up.

“Our dedicated teams of professionals have been preparing for this moment for months, and they are ready to work swiftly, but thoroughly, to carry out our inspections and investigations. Whether our teams are able to complete that work without obstruction will inform the PCAOB’s determinations at the end of this year.

“While we have much more work to do, we would never have gotten to where we are today without the work of the U.S. Congress, and I am grateful to Members of Congress for their ongoing leadership as the PCAOB continues our work to carry out the law.

“I want to thank my fellow PCAOB Board Members, Chair Gensler and the Securities and Exchange Commission for their support of the PCAOB’s efforts throughout this process, and our talented PCAOB staff – those who worked tirelessly to get to today’s agreement and those whose continued efforts will put it to the test.

“Now our work continues, guided by the same mission that guides everything we do at the PCAOB: protecting investors. That is what this is all about.”

The PCAOB inspects and investigates registered public accounting firms in more than 50 jurisdictions around the world, consistent with its mandate under the Sarbanes-Oxley Act.

But, for more than a decade, the PCAOB’s access to inspect and investigate registered public accounting firms in mainland China and Hong Kong has been obstructed.

In 2020, Congress passed the Holding Foreign Companies Accountable Act (HFCAA). Under the HFCAA, beginning with 2021, after three consecutive years of PCAOB determinations that positions taken by authorities in the People's Republic of China (PRC) obstructed the PCAOB's ability to inspect and investigate registered public accounting firms in mainland China and Hong Kong completely, the companies audited by those firms would be subject to a trading prohibition on U.S. markets.

Such a trading prohibition would be carried out by the Securities and Exchange Commission (SEC) and would apply to companies the SEC identifies as having used registered public accounting firms in mainland China and Hong Kong for three consecutive years.

In 2021, the PCAOB made determinations that the positions taken by PRC authorities prevented the PCAOB from inspecting and investigating in mainland China and Hong Kong completely.

The PCAOB is now required to reassess its determinations by the end of 2022.