As companies change auditors to avoid U.S. delisting, the agency's acting chief accountant warns of possible investigations and enforcement actions.
A Securities and Exchange Commission official cautioned that Chinese companies and their auditors could be subject to enforcement actions if they violate legal or auditing regulations.
The Holding Foreign Companies Accountable Act of 2020 could result in the removal of more than 200 Chinese companies from U.S. stock exchanges as early as the beginning of 2024. It prohibits trading in companies whose auditors cannot be inspected by the Public Company Accounting Oversight Board, the U.S. audit watchdog under the SEC's supervision, for three consecutive years.
The Securities and Exchange Commission warned Chinese companies on Tuesday not to violate legal and auditing requirements as they switch to U.S.-based auditors in order to comply with a law that threatens to delist them from American stock exchanges.
In order to avoid a potential trading ban, numerous Chinese companies with multinational operations have switched their primary auditors to U.S.-based accounting firms in recent months. Paul Munter, acting chief accountant at the U.S. securities regulator, said on Tuesday that these arrangements raise questions about whether the newly engaged audit firms in the U.S. and elsewhere fulfill their duties as lead auditors.
The PCAOB has recently strengthened the requirements for lead auditors supervising other auditors outside of their own firms. Auditors in charge are now required to obtain written attestations from third parties regarding the quality of their work.
Mr. Munter warned that Chinese companies and accounting firms "may be tempted to engage in an effective violation of other applicable legal and audit requirements," which could result in investigations and enforcement actions from the PCAOB, SEC, or both.
"Any attempt by issuers or accounting firms to engage in such an effective violation and avoid the consequences of the HFCAA in violation of other legal and auditing requirements should be avoided," Mr. Munter stated.
Several U.S.-based accounting firms are able to audit Chinese companies in collaboration with local accounting firms and independent contractors, who conduct the work on the computer systems of the U.S. audit firms. The PCAOB has the authority to examine audit records maintained by U.S. accounting firms.
After a decade-long standoff over the audit of working papers of New York-listed Chinese companies, the U.S. and Chinese governments reached an agreement last month for the PCAOB to inspect China-based audit firms. The agreement permits PCAOB inspectors to travel to Hong Kong and mainland China for inspection purposes.
Accounting firms that issue an annual report on a company's financial statements typically assemble a team of several external auditors, who are typically independent accountants or accounting firms. Under U.S. standards, audit firms are permitted to use the work of another auditor as long as the requirements for serving as the lead auditor can be met and the lead auditor is able to carry out its responsibilities regarding supervision and documentation.
Mr. Munter stated that if the lead auditor fails to comply with any of the PCAOB's inspection or investigative requirements, as well as other requirements, the firm's personnel and the company being audited could be held liable.
