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Statement on Agreement Governing Inspections and Investigations of Audit Firms Based in China and Hong Kong

Aug. 26, 2022

Today, the Public Company Accounting Oversight Board (PCAOB) signed a Statement of Protocol with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of the People’s Republic of China governing inspections and investigations of audit firms based in China and Hong Kong.

This agreement marks the first time we have received such detailed and specific commitments from China that they would allow PCAOB inspections and investigations meeting U.S. standards. The Chinese and we jointly agreed on the need for a framework. We were not willing to have PCAOB inspectors travel to China and Hong Kong unless there was an agreement on such a framework. In light of the time required to conduct these inspections and investigations, inspectors must be on the ground by mid-September if their work has any chance to be successfully completed by the end of this year.

Make no mistake, though: The proof will be in the pudding. While important, this framework is merely a step in the process. This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China. If it cannot, roughly 200 China-based issuers will face prohibitions on trading of their securities in the U.S. if they continue to use those audit firms.

Why do these inspections and investigations matter? It’s a privilege for foreign issuers to access our markets — the largest, deepest, most liquid markets in the world. Investors in U.S. markets should be protected — and have trust in a company’s financial numbers — regardless of whether an issuer is foreign or domestic. Further, if foreign issuers want access to our public capital markets, they must be on a level playing field with U.S. firms.

More than 50 jurisdictions have complied with the requirements that the PCAOB inspect and investigate audit firms of U.S.-listed companies, regardless of where the audit firm is based. Two have not: China and Hong Kong.

China-based issuers, however, have continued to access U.S. markets while not complying with the basic bargain of the Sarbanes-Oxley Act, enacted on a bipartisan basis 20 years ago this past July: If you want to issue public securities in the U.S., the registered public accounting firms that audit your books have to be subject to inspections and investigations by the PCAOB. When foreign issuers seek access to U.S. capital markets, they must abide by the same rules regarding auditing as our domestic issuers. These rules include a requirement that the PCAOB have the ability to inspect all audit work papers — standard, engagement-specific documentation of the audit work related to an issuer’s financial statements and the quality of the audit.

Congress recently reaffirmed the requirement for complete inspections and investigations under the Holding Foreign Companies Accountable Act of 2020 (HFCAA), which amended Sarbanes-Oxley. Under the HFCAA, if the PCAOB is “unable to inspect or investigate completely”[1] registered public accounting firms located in foreign jurisdictions, issuers that use those firms for three consecutive years face prohibitions on their securities trading in the U.S. — in this case, roughly 200 companies based in China.

This agreement announced today brings specificity and accountability to effectuate Congress’s intent. It provides the standards against which to judge whether auditors of Chinese issuers have complied with the requirements of U.S. law, including PCAOB auditing standards. I thank Congress for their attention to these important matters. In particular, Chinese authorities have committed to four critical items:

  • First, in accordance with the Sarbanes-Oxley Act, the PCAOB has independent discretion to select any issuer audits for inspection or investigation;
  • Second, the PCAOB gets direct access to interview or take testimony from all personnel of the audit firms whose issuer engagements are being inspected or investigated;
  • Third, the PCAOB has the unfettered ability to transfer information to the SEC, in accordance with the Sarbanes-Oxley Act; and
  • Fourth, PCAOB inspectors can see complete audit work papers without any redactions. On this last item, the PCAOB was able to establish view only procedures — as it has done in the past with certain other jurisdictions — for targeted pieces of information (for example, personally identifiable information).  

Going forward, will our markets include China-based issuers? That still is up to our counterparts in China. It depends on whether they comply with the requirements of U.S. law, as detailed in the framework.

Either way, I look forward to ensuring key investor protections in our markets — with China-based issuers, if this framework is followed; or without China-based issuers, if it is not.

Though much work remains to ensure compliance, I would like to thank our counterparts at the CSRC and the Ministry of Finance for the productive discussions to date.

I would like to thank my colleagues at the SEC and the PCAOB for their diligent work on these matters, including:

  • YJ Fischer, Paul Munter, Natasha Guinan, Kathleen Hutchinson, Matthew Greiner, Paul Gumagay, Megan Barbero, Elizabeth McFadden, Melissa Hodgman, Tejal Shah, and LaShawn Latson of the SEC; and
  • Chair Erica Williams, Board member Kara Stein, Board member Anthony Thompson, Board member Duane DesParte, Board member Christina Ho, Omid Harraf, George Botic, Karen Dietrich, Alan Lo Re, Beth Hilliard Colleye, and Juliann Ravas of the PCAOB.

[1] See S.945 - Holding Foreign Companies Accountable Act, available at

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