Pact enables PCAOB, Chinese regulators to cooperate on enforcement

BY KEN TYSIAC

The PCAOB has entered into a much-sought enforcement cooperation agreement with Chinese regulators.

A memorandum of understanding announced Friday creates a cooperative framework between the PCAOB and the China Securities Regulatory Commission (CSRC) and the Ministry of Finance (MOF).

The agreement does not allow for cross-border inspections, but it establishes a mechanism for producing and exchanging audit documents relevant to investigations in both countries’ jurisdictions.

Under the agreement, the PCAOB and the Chinese regulators will be able to request and receive from one another assistance in obtaining documents and information to aid them in their investigative duties.

The agreement is important because the PCAOB and the SEC have expressed frustration with their inability to review audit work performed for Chinese clients. Chinese law has been cited as a reason for audit firms’ refusal to share audit documents for Chinese clients with the PCAOB.

SEC Commissioner Luis Aguilar said in December at the AICPA Conference on Current SEC and PCAOB Developments that the problem needed to be resolved to protect investors and promote capital formation.

The agreement announced Friday is one step in that process, and the PCAOB is involved in continuing negotiations with the CSRC and MOF to permit joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

“This agreement with China is an important step toward cross-border enforcement cooperation that is necessary to protect the interests of investors in U.S. capital markets,” PCAOB Chairman James Doty said in a news release. “We look forward to continued progress with our Chinese counterparts to reach an agreement on cross-border inspections of PCAOB-registered firms as well.”

The PCAOB has agreements for joint inspections with regulators in six European Union states, including the United Kingdom and Germany, as well as several non-European regulators in North America, the Middle East, Asia, and Australia.

About 47 audit firms in China are registered with the PCAOB.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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