In May 2013, the US Public Company Accounting Oversight Board
("PCAOB"), the China Securities Regulatory Commission
("CSRC") and the Chinese Ministry of Finance
("MOF") signed an MOU to exchange information necessary
to secure compliance with securities laws, including certain audit
requirements, in China and the US.
The MOU was a first step toward resolving an impasse regarding
oversight by the PCAOB of auditors of Chinese US-listed companies.
Among other things, the PCAOB is empowered to force disclosure of
audit working papers, and to inspect the operations of auditors it
oversees. However, auditors for a number of US-listed Chinese
companies resisted disclosure of their working papers. They
asserted that the working papers were protected under Chinese law
and they could not disclose them to the US authorities without
risking sanctions in China.
Solving this impasse is crucial. If it persists, delistings of
affected Chinese issuers and disqualification of China-based
auditors could follow. If these results come to pass, Chinese
private issuers would find they have little, if any, access to US
The May 2013 MOU was initially criticized for failing to grant
the PCAOB the right to inspect China-based auditors of US publicly
traded foreign private issuers. Its terms also allow for refusal of
disclosure when such disclosure is inconsistent with local laws, or
contrary to public policy or essential national interest. Early
commentators expressed concern that these broadly worded exceptions
could be used to avoid any disclosures.
In recent months, however, it appears incremental progress has
been made. Recent developments indicate that obstacles to
disclosures have been overcome, at least for the purposes of an SEC
administrative proceeding brought against a number of auditors
affiliated with the Chinese auditors of several Chinese issuers.
The CSRC has apparently released audit working papers for at least
one of these issuers.2 However, disclosures remain
confidential under the MOU. The PCAOB can only share information
with the SEC, federal and state prosecutors and certain state
A decision in the SEC's administrative proceeding expected
in January will likely clarify the extent of those disclosures,
even if the full extent of the information disclosed is not made
public. Crucially, the fact that information was disclosed seems to
have had a positive effect on the market.
We expect to know more after a decision is handed down in later
this month. Further developments in the application of the MOU will
likely increase predictability for both issuers and the investing
community, and foster continued access to US capital markets for
Chinese issuers. That said, the broad wording of the MOU, together
with on-going concerns regarding confidentiality and other Chinese
regulatory implications of releasing audit working papers for
particular issuers, will require each request for disclosure to be
carefully analyzed, from both a Chinese and a US perspective.
1 We note that similar issues have arisen in Hong Kong.
This Haiwen Alert does not address those issues, which can be
viewed as distinct from the issues relating to PCAOB oversight of
2 Media reports indicate that audit papers for Longtop
Financial Technologies Ltd. have been provided. Seehttps://tax.thomsonreuters.com/media-resources/news-media-resources/checkpoint-news/daily-newsstand/chinese-audit-documents-remain-out-of-reach/
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