PCAOB gains breakthrough access to Chinese audit firms

Dive Brief:

In a breakthrough for the Public Company Accounting Oversight Board (PCAOB), the U.S. audit watchdog announced that it gained for the first time full, secure access to inspect and investigate public accounting firms based in mainland China and Hong Kong.
The news comes after the two countries reached a tentative deal in August that paved the way for U.S. officials to access audits. The progress also reduces the risk that hundreds of Chinese stocks in the U.S. will be delisted, and Chinese stocks in the U.S. jumped on the news Thursday, according to a Bloomberg report.
The results of the findings will be addressed separately, Chair Erica Y. Williams said in a press release. “Today’s 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.”

Dive Insight:

For CFOs, the PCAOB’s progress in China is a welcome move toward obtaining transparency and validating the financial results of China-based companies, according to Omar Roubi, Instructor of Accounting at the University of Colorado Denver and director of technical education at LumiQ, a podcasting app for CPAs. Such information is important for companies who heavily rely on Chinese firms, he said.

China is “a huge part of the global economy and this first step is a way...for auditors and CFOs to begin to understand how these businesses are actually operating,” Roubi said in an emailed answer to questions. This benefits CFOs of companies with Chinese companies in their value chains, he said.

The PCAOB, in Thursday’s release, said passage of the Holding Foreign Companies Accountable Act was instrumental to gaining access and sending the message that access to U.S. markets was “a privilege and not a right.”

As part of the work recently done by the PCAOB, more than 30 staff members conducted on-site inspections and investigations in Hong Kong, taking testimony and reviewing documents from September to November. KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers in Hong Kong were selected for inspection, according to the release.

The Securities and Exchange Commission oversees the PCAOB, which in turn supervises the accounting firms that audit public companies. Congress established the auditing watchdog after the Enron accounting scandal under the Sarbanes-Oxley Act of 2002.

The regulators’ push to hold China-based companies listed on U.S. exchanges to the same standards as U.S. firms comes as the board has broadly stepped up scrutiny of auditors.