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:
- the ability to conduct inspections and investigations consistent with our mandate;
- the ability to select the audit work and potential violations to be examined; and
- 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 13 month period ended March 31, 2021, 16 PCAOB-registered firms in mainland China and Hong Kong signed audit reports for 200 public companies with a combined global market capitalization (U.S. and non-U.S. exchanges) of approximately $2.3 trillion. The ten largest of these companies had a combined market capitalization of approximately $1.5 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. 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:
- Audit Reports Issued by PCAOB-Registered Firms in Jurisdictions where Authorities Deny Access to Conduct Inspections
- Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited
- Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally—Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China
- Staff Q&A: Audits of Mainland China Issuers by Registered Firms Outside of Mainland China