Under an MOU signed earlier this year between U.S. and Chinese regulators, PCAOB may request the audit documents of U.S.-listed, China-based companies from CSRC. In providing the audit documents, CSRC relies on a provide-or-explain mechanism allowing the legal counsel of both the concerned company and the concerned company's auditing firm to refuse the provision of certain documents by giving a convincing explanation. In addition, CSRC also allows refusal of a PCAOB request in case the audit documents in question contain certain "sensitive information", the "sensitive" determination to be made by CSRC on a case-by-case basis. As such, compliance with the regulatory authorities in the context of the MOU is likely to require a complicated and substantial document review processes, and should be carried out with the assistance of both legal and accounting advisors.

Memorandum of Understanding

The Public Company Accounting Oversight Board ("PCAOB") has agreed a Memorandum of Understanding (MOU) with the China Securities Regulatory Commission ("CSRC") and the Ministry of Finance ("MOF"), which came into effect on 10 May 2013. The MOU establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in each country's respective jurisdiction. From the U.S. perspective, the PCAOB will have a mechanism, through the CSRC, to request and obtain audit documents from China-based audit firms registered with the PCAOB. And thereafter PCAOB may share those documents with the U.S. Securities and Exchange Commission ("SEC"), simply giving Chinese regulators advance notice of such sharing.

With the signing of the MOU, the potential exists for the floodgates to open in regards to the SEC and PCAOB obtaining audit documents of U.S.-listed, China-based companies. Companies of this description have long been the target of PCAOB and SEC investigations as alleged accounting fraud has cost U.S. investors billions of dollars, and it is the duty of these organizations to protect the interests of investors in U.S. capital markets. Indeed, as early as July 2013, PCAOB had already requested and obtained, and subsequently shared with the SEC, the first batch of audit documents under the purview of the MOU. And it has been reported that PCAOB has already sent subsequent lists of targeted Chinese companies to CSRC to request their audit documents.


Under the MOU, PCAOB may only request audit documents through CSRC, not directly from the U.S.-listed, China-based companies or their auditing firms, and thereafter the CSRC will work with the companies and their audit firms to determine whether the audit documents should be produced. Whilst CSRC itself does not conduct substantial examinations of the requested documents, it uses a provide-or-explain mechanism allowing legal counsel for both the accounting firm and the concerned company to refuse to provide certain documents if they give convincing reasons why such documents should not be provided.

The MOU also contains several provisions under which either party may refuse cooperation with a request by the other party. For instance, requests which would cause the requested party to act in a way which would violate domestic law or is contrary to public interest or essential national interest may be refused. Two potential grounds for refusal under this provision immediately come to mind: (i) according to the Law of the PRC on Guarding State Secrets, data containing state secrets are not allowed to be exported outside China; and (ii) according to the PRC Accounting Archives Management Measures and PRC Archives Law, accounting archives are not allowed to be exported outside China. These were the laws which precluded sharing of audit documents prior to the signing of the MOU. And, as the MOU itself states that it is not intended to create legally binding obligations, it appears these two laws may continue to be stumbling blocks.

In addition to the terms of the MOU, CSRC also allows companies to refuse to provide certain audit documents if such documents contain "sensitive information". However, CSRC has not provided guidance regarding its position on the definition or scope of such so-called "sensitive information". Rather, in our experience it appears that CSRC will proceed on a case-by-case basis in this regard. Until the publication of a precise definition of "sensitive information" the phrase will be susceptible to multiple interpretations, and will affect implementation of the MOU going forward.


Despite several factors which seem to undermine the potential influence of the MOU, the successful transfer of the audit documents of a few companies in the initial months of cooperation under the MOU seems to promise much, and the trend toward greater cooperation is clear. We believe it will be a robust platform for cooperation and information exchange going forward.

From a practical point of view, compliance with authorities in the context of the MOU is likely to require detailed and substantial document review processes. And the documents in question are likely to include both legal documents and complex financial documents. Thus, legal professionals will need to develop close working relationships with accounting professionals to synthesize, quickly and accurately, large amounts of data in the event they are called on to assist a client to comply with a request for documents pursuant the MOU. 

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