PCAOB to inspect Chinese audit firms for first time

December 22, 2022

Chinese companies will come under the scrutiny of the Public Company Accounting Oversight Board (PCAOB) for the first time on the back of new Congressional legislation.

The PCAOB will now have extensive access to examine and investigate the audit firms of China-based companies.

The move eliminates the risk of around 200 Chinese companies being removed from U.S. stock exchanges.

The passing of the Holding Foreign Companies Accountable Act “sent a clear message” that access to U.S. capital markets is a “privilege and not a right, and China received that message loud and clear,” PCAOB Chairwoman Erica Y. Williams said in a statement.

She added: “I want to be clear: this is the beginning of our work to inspect and investigate firms in China, not the end. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward. Our teams are already making plans to resume regular inspections in early 2023 and beyond, as well as continuing to pursue investigations.

“The Board does not have to wait another year to reassess its determinations. Should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access – in any way and at any point in the future – the Board will act immediately to consider the need to issue a new determination,” she said.

Congress passed the Holding Foreign Companies Accountable Act in December 2020, outlining a 2024 deadline for the U.S. and China to settle on an agreement.

The deal was signed in August permitting the PCAOB to carry out inspections in Hong Kong in mid-September.

Williams noted that the announcement should “not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong.”

“It is a recognition that, for the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them,” she said.

SEC Chairman Gary Gensler echoed the sentiment, stating that "a lot of work remains to protect investors and ensure ongoing compliance."

But PCAOB staff discovered several probable deficiencies in their inspections.

“This is exactly why Congress passed the HFCAA in the first place,” said Williams, “so we could open up the books, identify potential problems, and begin the work of holding firms accountable to fix them. And that is exactly what we intend to do.

“Again, this is the beginning of the PCAOB’s work to inspect and investigate firms in mainland China and Hong Kong, not the end,” she said.