On September 6, 2022, the OCA released a statement regarding audit quality and investor protection under the Holding Foreign Companies Accountable Act ("HFCAA"). The statement reiterates the importance of high quality audits in protecting investors, instilling shareholder confidence in the quality of the financial information, and enabling public companies to raise capital efficiently. The OCA notes that in response to additional oversight requirements under the HFCAA, foreign issuers (particularly in China and Hong Kong) are structuring alternative engagements to change their lead auditor from a local registered public accounting firm to a registered public accounting firm located either in the United States or elsewhere, generally within the same network, to avoid the potential of consecutive PCAOB HFCAA determinations and potential trading violations. This poses special challenges that raise questions about whether the newly engaged registered public accounting firm will be able to satisfy its responsibilities to serve as lead auditor.

The OCA highlights two primary structures of engagement multinational issuers employ. First, issuers with multiple locations or business units may choose to retain a lead auditor that the PCAOB is already able to inspect or investigate completely that uses, and assumes the responsibility for, the work of other independent auditors or uses the reports of other independent auditors. Second, issuers may choose to retain a lead auditor that the PCAOB is able to inspect or investigate completely that, in turn, directly engages another independent accounting firm or other individual accountants to participate under the direction and supervision of the lead auditor. These structures permit the accounting firm retained by the issuer 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 fulfill its responsibilities, including those for supervision and documentation.

To ensure that parties are compliant with the PCAOB's standards, the issuer may need to authorize appropriate communications between the old and new auditors and avoid placing limitations on the responses of the predecessor accounting firm. Further, the predecessor accounting firm should avoid creating roadblocks in engagement with the successor accounting firm. If the lead auditor fails to meet its legal or professional obligations, or engages in any efficient breach of the HFCAA or PCAOB standards, it could result in significant liability for the auditor and the issuer. See the full statement here.

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