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Three Reasons The PCAOB’s Agreement With China May Not Have Changed The Landscape – Accounting Standards


After months of closed-door negotiations, the Public Company
Accounting Oversight Board (PCAOB) announced on Friday that it has
entered into a Statement of Protocol with the China Securities
Regulatory Commission (CSRC) and the Ministry of Finance of the
People’s Republic of China (PRC).1 The Statement of
Protocol creates a pathway for companies based in China and Hong
Kong to remain listed on US exchanges past 2024, notwithstanding
the Holding Foreign Companies Accountable Act (HFCAA) adopted in
2020.2 Despite this milestone, there are at least three
reasons why this agreement may not be as significant as the press
reporting suggests.


The HFCAA directs the US Securities and Exchange Commission
(SEC) to prohibit trading of a registrant’s securities on any
US securities exchange if, for three consecutive years, the company
was identified as having used a registered public accounting firm
that the PCAOB determined it was unable to inspect or investigate
completely because of a position taken by the relevant foreign
regulatory authority. In response to concerns related to the
domestic legal regime around protection of state secrets and data
privacy concerns, auditors in the PRC and Hong Kong for more than a
decade have not given the PCAOB full access to their audit work
papers, for example, by withholding or heavily redacting audit work
papers and by restricting the PCAOB’s ability to select for
inspection the audits of state-owned enterprises and companies in
strategic industries. As a consequence, absent a change in the
PCAOB’s ability to inspect PRC and Hong Kong auditors, the
HFCAA would cause trading in the securities of PRC- and Hong
Kong-based companies to cease on US exchanges by 2024.

The Statement of Protocol establishes a framework for the PCAOB
to inspect and investigate registered public accounting firms in
the PRC and Hong Kong, including all work papers related to audits
of US-listed Chinese companies.

Three Reasons the PCAOB’s Agreement With China May Not Have
Changed the Landscape

  1. The Statement of Protocol Is Simply a First

    US officials’ statements surrounding the Statement of Protocol
    were unusually pointed in emphasizing that the jury is still out on
    whether the PRC and Hong Kong will indeed allow the PCAOB to
    inspect and investigate completely their PCAOB-registered public
    accounting firms. In particular, while PCAOB Chair Erica Williams
    stated that the Statement of Protocol afforded the PCAOB
    “complete access” to audit work papers, audit personnel
    and other information, she stated that “the real test will be
    whether the words agreed to on paper translate into complete access
    in practice.” Similarly, SEC Chair Gary Gensler stated:
    “The proof will be in the pudding.” The CSRC also issued
    tempered remarks, characterizing the Statement of Protocol as a
    “first step.”3

    The agreement will be tested soon. Chair Gensler stated that
    “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”—in time for the annual determination to be made by
    the PCAOB when it reassesses whether the positions taken by PRC
    authorities have again prevented the PCAOB from completely
    inspecting and investigating audit firms in the PRC and Hong Kong.
    The PCAOB’s annual determination in 2022 would be especially
    significant if Congress were to pass the accelerating legislation
    referenced below, because it could trigger delistings as early as

    From the perspective of US regulators, it will be incumbent upon
    PRC authorities to comply in all respects with the requirements of
    US law and the new Statement of Protocol—and to avoid
    creating inspection obstacles similar to those in the past. Were
    such obstacles to occur, there is a significant risk that US
    regulators would view them as undermining the principles behind the
    Statement of Protocol.

  2. The Statement of Protocol Will Have Limited
    Application, as Chinese Issuers Have Already Been Leaving US

    Under the threat of delisting from the HFCAA, issuers based in the
    PRC and Hong Kong already have begun voluntarily delisting from US
    exchanges. For example, earlier this month, five of China’s
    largest state-owned companies announced plans to delist from US
    exchanges. In addition, Alibaba announced plans to seek a primary
    listing in Hong Kong, signaling an abandonment of the US markets
    among a sizable portion of the total market value at risk of
    delisting.4 This creates a possibility that the PRC and
    Hong Kong will become more permissive with respect to the
    PCAOB’s inspections, given that the companies with the most
    sensitive data have already opted to delist from US

    However, while these moves might alleviate some of the PRC’s
    historic concerns around audit inspections, the PCAOB’s
    inspection authority is retroactive, and audits of these large
    issuers could still be subject to PCAOB inspection. If this were to
    occur, it could set the stage for an even more demanding test of
    the PRC’s willingness to completely abide by the terms of the
    Statement of Protocol.

  3. Congress Continues to Take a Hard Line on

    Both the HFCAA and pending accelerating legislation5 are
    the product of a group of legislators who have called on the Biden
    Administration to take a harder line on China, both with respect to
    securities regulation and in other areas. Some of the HFCAA’s
    proponents responded to the announcement of the Statement of
    Protocol by urging the SEC and the PCAOB to continue to enforce the
    HFCAA rigorously, even if it were to result in delistings. For
    example, Senator Marco Rubio “urged the PCAOB to accept
    nothing less than full compliance to the agreement” and
    expressed plans to continue working with the PCAOB to ensure full
    enforcement of the HFCAA.6 Senator John Kennedy stated:
    “We’ve got the regulatory hammer, and we will use it
    without flinching.”7 Senator Kennedy also called on
    Congress to pass his Accelerating Holding Foreign Companies
    Accountable Act without delay—as noted above, that act would
    cause PRC and Hong Kong companies whose auditors had not been
    subject to PCAOB inspection to be delisted by 2023 rather than
    2024, further reducing the window for comprehensive

The risk of delisting PRC- and Hong Kong-based companies from US
exchanges is still present, despite the Statement of Protocol.
Challenges similarly persist for auditors that are, or utilize
audit firms that are, based in the PRC and Hong Kong. Aside from
navigating the PCAOB’s upcoming inspections, audit firms could
face other risks as well, such as renewed scrutiny around the use
of other auditors and accounting service providers, including
compliance with the applicable PCAOB auditing standards and consent
requirements in Section 106 of the Sarbanes-Oxley Act. It will be
critical to monitor developments around the inspection of PRC- and
Hong Kong-based audit firms in the coming months.


1. Press Release, Pub. Co. Accounting Oversight Bd.,
PCAOB Signs Agreement with Chinese Authorities, Taking First Step
Toward Complete Access for PCAOB to Select, Inspect and Investigate
in China (Aug. 26, 2022),;
Sec. and Exch. Comm’n, Fact Sheet: PCAOB Agreement With China
on Audit Inspections and Investigations (Aug. 26, 2022),;
Sec. and Exch. Comm’n, Fact Sheet: Statement of Protocol
– Questions and Answers (Aug. 26, 2022),
Public reporting indicates that the PCAOB’s inspections will
take place in Hong Kong, but the U.S. and Chinese official
statements are not clear on this point.

2. Pub. Law No. 116-222 (2020).

3. China Sec. Regulatory Comm’n, CSRC Officials
Answered Reporter Questions Regarding China-U.S. Audit Oversight
Cooperation Agreementt (Aug. 25, 2022),

4. Lulu Yilun Chen & John Cheng, China
State-Owned Giants to Delist From US Amid Audit Spat
Bloomberg, Aug. 12, 2022,

5. In February 2022, as part of a broader legislative
package, the U.S. House of Representatives passed legislation to
“accelerate” the HFCAA’s timeline from three
consecutive non-inspection years to two. United States Innovation and Competition Act of
2021, H.R. 4521, 117th Cong. § 60301 (2022)
. Thus, under
this legislation, trading prohibitions would have occurred by 2023
rather than 2024. However, the provisions on accelerating the HFCAA
were omitted from the final legislative package approved by
Congress. In addition, in June 2021, the Senate passed similar,
stand-alone accelerating legislation, but the House of
Representatives did not pass companion legislation. S. 2184, 117th Cong. (2021).

6. Press Release, Marco Rubio, Rubio Urges Full
Compliance in China Audit Agreement: “No Exceptions”
(Aug. 26, 2022),

7. Press Release, John Kennedy, Kennedy Statement on
U.S.-China Agreement on Auditing Chinese Firms (Aug. 26, 2022),

8. S. 2184, 117th Cong. (2021). This bill passed
the Senate in 2021 and is similar to a provision in the
later-passed United States Innovation and Competition Act of 2021
that the House passed in 2022. The corresponding version of the
United States Innovation and Competition Act of 2021 before the
Senate does not include the accelerating provision.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.


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