- The PCAOB’s Memorandum of
Understanding with the CSRC signals further cooperation
between Chinese and US regulators on issues related to
- However the MoU represents a first step. There
must be an investigation of conduct before the PCAOB can
request financial records, and the regulator must approve
them before they are turned over to the PCAOB;
- This MoU does not affect companies already under
SEC enforcement actions;
- The MoU affirms that talks are ongoing between
the PCAOB and CSRC, although it is unclear whether this will
change the SEC’s stance.
The US Public Company Accounting Oversight Board
(PCAOB’s) Memorandum of Understanding (MoU) with the China
Securities Regulatory Commission (CSRC) is a step in the right
direction. But it doesn’t solve the US Securities
and Exchange Commission (SEC) remaining issues.
US-listed ChinaCos and their auditors have been
hard hit by fraud allegations from both short-sellers and US
regulators. Their case has not been helped by their inability
to turn over their audit work papers – the CSRC has
declared that these papers are state secrets and cannot leave
However the CSRC’s MoU with the PCAOB
doesn’t mean that all issues are resolved with the
SEC. Although it probably eliminates the worst case scenario
– that all ChinaCos must delist from US exchanges
– an agreement with the SEC remains key.
Jones Day’s Gene Buttrill said that in
obtaining this MoU, the PCAOB doesn’t want to
indicate that it has somehow usurped the SEC’s
ability to negotiate a resolution with the Chinese government
or that all Chinese companies are safe investments.
However, he added that the point to make is that
the PCAOB has actually done a great job in representing
interests of auditors, regulators and investors, and has always
been open to discussions when approaching PRC regulators.
They are very focused on not making this a public
issue and addressing it in a more personal way, he noted.
But this approach unfortunately contrasts with that
of the SEC, which he said has made it much more public and has
been much more aggressive in addressing the issue.
Although this more adversarial approach may work
for US regulators, Chinese regulators are less likely to
appreciate interactions of that nature.
What’s in the
The PCAOB will now be able to pull up financial
records in relation to a conduct investigation and pass those
documents on to the relevant regulators such as the SEC.
However Chinese regulators must approve the
financial records of the company to ensure that giving the
documents to the PCAOB doesn’t violate local law
or national interest.
This is a potentially important exemption as some
of the companies involved in alleged accounting fraud are in
Further, Buttrill added that the ability to pull up
documents in relation to a conduct investigation is very
different from the PCAOB’s ability to review audit
papers in the course of reviewing that auditor.
In China, he said, the PCAOB will not be able to
enter and ask for a sampling of work. Instead they must have
grounds to start an investigation to request papers, which is
only likely once the client of an auditor is in trouble.
"Essentially they won’t have the
ability to prevent bad auditing practices from happening," he
What this means for companies under scrutiny
Although Deloitte asked a US court to dismiss its hearing
related to Longtop Financial Technologies after the MoU was
signed, it is not expected to affect companies for which the
SEC has already begun enforcement actions.
Buttrill added that as for companies already
dealing with SEC enforcement actions, this MoU does not change
"They’ve already made mistakes, and
the issue now is how they should be punished," he said.
What to expect
Sources noted that between the CSRC and PCAOB, the CSRC is more positive about this
agreement as it represents a notable shift from its former
position. However they added that the PCAOB is more cautious
about this MoU, as it still provides less transparency than it
sees from most other nations.
Regardless, the releases from both regulators made
it clear that they are committed to finding a cross-border
regulatory regime for audit firms in China working with
As for the SEC’s ongoing issues
related to the CSRC’s state secrecy statutes, this
agreement may give the regulator more impetus to find a
Buttrill stressed that the PCAOB’s MoU
will not impact the SEC’s cases against the
so-called Big Four, but instead puts political pressure on them
to find another solution.
Hopefully, he added, this indicates that the US
government is willing to take a less aggressive position on
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