FACT SHEET: PCAOB Secures Complete Access to Inspect, Investigate Chinese Firms for First Time in History
Investors Are More Protected Today Because of HFCAA
The United States Congress sent a clear message in passing the Holding Foreign Companies Accountable Act of 2020 (HFCAA) that access to U.S. capital markets is a privilege and not a right. Thanks to the HFCAA, the PCAOB was able to secure complete access to inspect and investigate audit firms in the People’s Republic of China (PRC) for the first time in history, in 2022. Therefore, on December 15, 2022, the PCAOB Board voted to vacate previous determinations to the contrary. Investors are now more protected because Congress acted, giving the PCAOB leverage through the HFCAA to secure this unprecedented access.
Before determining that the PCAOB was able to inspect and investigate firms in mainland China and Hong Kong, completely, the PCAOB laid out three criteria required for achieving complete access: (1) 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; (2) PCAOB inspectors and investigators must be able to view complete audit work papers with all information included and to retain information as needed; and (3) the PCAOB must have direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.
In August 2022, the PCAOB secured a written agreement with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of the PRC (MOF) outlining protocols for meeting each of the three criteria.
The PCAOB then thoroughly tested compliance with every aspect of the agreement necessary to determine complete access. This included sending more than 30 PCAOB staff to conduct on-site inspections and investigations in Hong Kong over a nine-week period from September to November. The PCAOB conducted inspection field work and investigative testimony in a manner fully consistent with the PCAOB’s methodology and approach to inspections and investigations in the U.S. and globally.
1. The PCAOB exercised sole discretion to select the firms, audit engagements, and potential violations it inspected and investigated – without consultation with, nor input from, PRC authorities.
Inspections
Investigations
2. PCAOB inspectors and investigators were able to view complete audit work papers with all information included, and the PCAOB was able to retain information as needed.
3. The PCAOB had direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspected or investigated.
The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward and is already making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed.
The Board does not have to wait another year to reassess its determinations. Should the PRC authorities obstruct the PCAOB’s access to inspect or investigate completely in any way and at any point, the Board will act immediately to consider the need to issue new determinations consistent with the HFCAA.
Investors are now more protected because the PCAOB has been able to inspect and investigate audit firms in mainland China and Hong Kong completely.
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 the PCAOB’s access to inspect and investigate registered public accounting firms in mainland China and Hong Kong has always 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 obstructed the PCAOB’s ability to inspect and investigate registered public accounting firms in mainland China and Hong Kong completely, the issuers 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 firms headquartered in mainland China and Hong Kong completely.
On August 26, 2022, 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, taking 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 September to November 2022, more than 30 PCAOB staff conducted on-site inspections and investigations in Hong Kong over a nine-week period, thoroughly testing all aspects of the agreement necessary to assess whether PRC Authorities would allow complete access.
Throughout the course of those inspections and investigations, PRC authorities did not obstruct the PCAOB’s ability to inspect and investigate completely, consistent with U.S. law. On December 15, 2022, the PCAOB Board voted to vacate the previous 2021 determinations.
Should PRC authorities obstruct the PCAOB’s access to inspect or investigate completely in any way and at any point in the future, the Board will act immediately to consider the need to issue new determinations consistent with the HFCAA.
Unprecedented Access:
Thoroughly Tested:
Ongoing Accountability:
Investors Better Protected:
Additional Background: