U.S. and Chinese Regulators Reach Agreement on Oversight of Audit Firms Based in China

The Public Company Accounting Oversight Board (PCAOB), the China Securities Regulatory Commission, and the Ministry of Finance of China reached an agreement (Statement of Protocol) that provides the PCAOB with the sole discretion to select the subject of its accounting firm inspections and investigations without involvement from Chinese authorities.

The Statement of Protocol is a result of months of negotiations after the U.S. Congress passed, and then-President Trump signed into law, the “Holding Foreign Companies Accountable Act” (HFCAA) in 2020. The HFCAA grants the SEC the authority to prohibit the trading of securities of a non-U.S. company on a U.S. stock exchange if the PCAOB determines it has been unable to inspect the company’s accounting firm for three consecutive years. By August 2022, over 160 China-based companies were identified by the SEC as entities that retained an accounting firm that the PCAOB was unable to inspect or investigate completely.

In a statement, SEC Chair Gensler stated “the proof will be in the pudding,” adding that, “this agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China.”

Click here to read a Davis Polk client alert on the agreement reached between US and China regulators.
Click here to read an SEC Factsheet detailing the Statement of Protocol.
Click here to read an SEC “Q&A” covering the Statement of Protocol.