SEC to auditors: Use care with Chinese engagements

By Bryan Strickland

Public audit firms considering engagements with issuers in China and Hong Kong that trade on U.S. capital markets should be aware of the "special challenges" they may face, the SEC's acting chief accountant warned Tuesday.

Paul Munter, CPA, issued a statement stressing that lead auditors taking on new clients must understand the compliance responsibilities that come with such an engagement. Some issuers in China and Hong Kong are facing the possibility of being removed from U.S. markets for not adhering to the Holding Foreign Companies Accountable Act (HFCAA) of 2020, which established that issuers trading in the United States are subject to PCAOB-compliant inspections, regardless of where the issuer is based.

"It appears that certain China- and Hong Kong-based issuers have begun attempting to structure audit engagements not with local registered public accounting firms but with registered public accounting firms located either in the U.S. or elsewhere to avoid the potential of consecutive PCAOB HFCAA determinations and a potential resultant trading prohibition," Munter said. "… Such arrangements pose special challenges that raise questions about whether the newly engaged registered public accounting firms — whether located in the U.S. or elsewhere — will be able to satisfy their responsibilities to serve as the lead auditor."

Munter warned that public audit firms must confirm that they can meet the PCAOB's standards for lead auditors before accepting an engagement. Among the responsibilities, newly engaged lead auditors must be able to access the workpapers from the issuer's previous financial statements and have open access to the issuer's previous auditors.

"If the issuer does not authorize appropriate communications, or places significant limitations on the responses of its predecessor accounting firm, the new accounting firm may not be able to accept the engagement and be in compliance with applicable PCAOB standards. The same is true if the predecessor auditor creates roadblocks and fails to engage in appropriate communications or to provide requested information, including prior workpapers," Munter said. "Therefore, accepting such an engagement to serve as the retained lead auditor creates risk for the new accounting firm of potential enforcement action by the PCAOB, the commission, or both, and creates potential liability for the issuer.

"In other words, exchanging noncompliance with SOX and HFCAA for retaining an accounting firm in violation of PCAOB standards is simply trading one bad outcome for another and does not adequately address the underlying problem."

On Aug. 26, the PCAOB announced a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People's Republic of China allowing the PCAOB to inspect publicly traded companies in China and Hong Kong the same way it does in other jurisdictions.

"While this agreement is an important step," Munter said, "it remains to be seen whether the PCAOB will, in fact, be permitted, pursuant to the terms of the Statement of Protocol, to inspect and investigate completely audit firms in China and Hong Kong."

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at

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