Some time last year PCAOB inspectors visited China and while details of their visit were kept somewhat quiet from both sides, we were told that the inspectors gained unprecedented access to Chinese audit work. This event did not come about because China suddenly warmed to the PCAOB, rather Congress urged their cooperation along with the Holding Foreign Companies Accountable Act of 2020, threatening delisting from American exchanges if they did not comply. And so they did, and the PCAOB went into it with three requirements:
- the PCAOB must have sole discretion to select the firms, audit engagements, and potential violations it inspects and investigates – without consultation with, nor input from, PRC authorities;
- PCAOB inspectors and investigators must be able to view complete audit work papers with all information included and to retain information as needed;
- the PCAOB must have direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.
Working off of a fact sheet released in December by the PCAOB, we find out that the PCAOB selected two firms for inspection — KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers in Hong Kong — and inspected eight audits between them. To test the “complete access” of HFCAA, PCAOB staff were especially interested in audit engagements to which PRC authorities had previously denied access, including issuer engagements that PRC authorities historically categorized as sensitive.
To test compliance with the agreement, the PCAOB requested that the transfer of documents take place on two occasions, with one batch transferred at the mid-point of inspection field work and a second batch transferred at the end of field work. PRC authorities met both deadlines and transferred to the PCAOB all documents, which were substantial in volume, as requested by the PCAOB to support the inspection work performed over the selected audit engagements.
While most people were too cautious to say that the successful inspection of Chinese firms could mean a new era of cooperation between China and the PCAOB, this week we have learned that any of those people who thought that would happen are probably going to be disappointed.
Chinese authorities have urged state-owned firms to phase out using the four biggest international accounting firms, signaling continued concerns about data security even after Beijing reached a landmark deal to allow US audit inspections on hundreds of Chinese firms listed in New York.
China’s Ministry of Finance is among government entities that gave the so-called window guidance to some state-owned enterprises as recently as last month, urging them to let contracts with the Big Four auditing firms expire, according to people familiar with the matter. While offshore subsidiaries can still use US auditors, the parent firms were urged to hire local Chinese or Hong Kong accountants when contracts come up, one of the people said, asking not to be identified discussing private information.
China is seeking to rein in the influence of the US-linked global audit firms and ensure the nation’s data security, as well as to bolster the local accounting industry, the people said. Beijing has been giving the same suggestion to state-backed firms for years, but recently re-emphasized that companies should use other auditors than the Big Four, the people added. No deadline has been set for the changes and replacements may happen gradually as contracts expire.
In making the decision which audits to inspect, the PCAOB specifically sought out those engagements that were previously considered sensitive in order to measure compliance with the complete access required under U.S. law. It seems China did not take too kindly to that.
Sorry to anyone who thought we were on the brink of a new age of cooperation and compliance between Beijing and Washington.
The inspectors are lucky. Depending upon what they wanted to look at, they could have been arrested as being spies.