Today, many companies operate in more than one country, requiring them to comply with multiple sets of rules and regulations. This can sometimes be challenging for businesses and their advisors. Case in point: Some auditors who are registered with the Public Company Accounting Oversight Board (PCAOB) have been uncertain whether they’re required to present audit working papers and other documentation to the PCAOB in light of a 2015 rule issued by the Chinese Ministry of Finance (MOF) that bars audit firms from transmitting documents overseas.
On December 31, 2016, the PCAOB responded to these concerns, confirming that auditors who are registered with it must, indeed, comply with PCAOB document presentation rules. The recent PCAOB guidance helps auditors and their clients better understand the board’s expectations — but it could also lead to more conflicts in the future.
Balance of power
In 2015, the Chinese MOF issued Interim Provisions on Auditing Operations Conducted by Accounting Firms Concerning the Overseas Listing of Domestic Chinese Companies to help prevent inadvertent disclosure of state secrets. The rule prevents audit working papers from being transmitted overseas and, instead, requires them to stay in mainland China. These rules don’t apply to the work done by the mainland affiliates of the Big Four, but they do apply to Hong Kong firms signing off on work done by a mainland firm.
Despite several years of negotiations, the PCAOB doesn’t have an agreement with Chinese authorities to regularly inspect firms whose clients trade on U.S. markets. Chinese officials fear that allowing foreign inspection may infringe on China’s sovereignty.
To help clarify matters, the PCAOB recently issued Staff Questions and Answers: Audits of Mainland China Issuers by Registered Firms Outside of Mainland China. The guidance explains how the Chinese MOF rule affects PCAOB-registered auditors from outside of China that do audit work there.
The four-page staff document says that, despite the MOF’s 2015 rule, an audit firm registered with the PCAOB, without exception, must provide audit working papers and other documents in connection with board inspections and investigations.
“The PCAOB will expect the firm to ensure that the materials are completely and unconditionally produced to the PCAOB by the PCAOB prescribed deadline,” the staff Q&As say. “The board has stated that non-U.S. legal obstacles do not create an exception to a registered firm’s obligation to provide documents and other information to the board, and they are not a defense to board disciplinary action for noncooperation, including potentially revocation of a firm’s PCAOB registration.”
Moreover, the staff Q&As stress that an audit firm shouldn’t expect relief from compliance with PCAOB requests for documents or other information. Auditors should consider this guidance when considering accepting or continuing engagements.
The PCAOB interpretive guidance also deals with more technical matters. One question asks whether, if a firm does an audit with a non-U.S. accounting firm, the non-U.S. auditor must be registered with the PCAOB. The answer depends on whether the participating firm plays a “substantial role” defined in PCAOB rules. If that firm exceeds the threshold for a substantial role, it must register with the PCAOB.
The interpretive guidance also explains that, depending on the nature of the other firm’s participation in an audit, the lead firm has to comply with either PCAOB Auditing Standard (AS) 1201, Supervision of the Audit Engagement, or AS 1205, Part of the Audit Performed by Other Independent Auditors.
“In all circumstances, the firm should be mindful of compliance with other applicable PCAOB auditing standards and independence requirements, including with respect to the independence of the participating non-U.S. auditor,” the interpretive document says.
The power struggle between the Chinese government and the PCAOB is likely to continue. Paul Gillis, a professor of management at Peking University, posted in his “China Accounting Blog,” “The Q&A cynically sets up a requirement that no firm can comply with. The PCAOB needs to find a way to reach agreement with Chinese regulators to conduct inspections, discontinue the need for inspections, or deregister the firms it cannot inspect. Telling the firms that they will be punished if they do not break Chinese law in order to supply documents is not useful guidance.”
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