According to SEC data, more than 200 U.S.-listed Chinese companies face the risk of being delisted from U.S. securities exchanges under the Holding Foreign Companies Accountable Act (HFCAA). Under the HFCAA, Chinese companies that cannot be fully inspected or investigated by the Public Company Accounting Oversight Board (PCAOB), the top U.S. audit regulator, by 2024 would be prohibited from being listed on U.S. securities exchanges.
To avoid trading prohibitions, many China- and Hong Kong-based companies have begun to structure their audit engagements with registered public accounting firms located either in the United States or elsewhere. However, these new arrangements raise new concerns about whether the newly engaged audit firms meet their responsibilities as a lead auditor.
In a statement, Paul Munter, acting chief accountant at the SEC, said the newly retained accounting firm “should communicate with the predecessor accounting firm and evaluate the information obtained prior to accepting the engagement. Critically, the predecessor accounting firm should respond fully to any inquiries that the new accounting firm makes under applicable PCAOB standards, including any requests for access to the work papers of the predecessor accounting firm relating to audits of previous financial statement periods.”
Additionally, Munter said the newly engaged accounting firm should make inquiries of the predecessor accounting firm about the following matters:
- The integrity of the company’s management;
- Any disagreements with management that the predecessor firm may have had regarding accounting principles or other significant matters encountered during the previous audit(s);
- Communications of matters between the predecessor firm and the company’s audit committee;
- The predecessor firm’s understanding of the nature of the company’s relationships and transactions with related parties and any significant unusual transactions; and
- The predecessor auditor’s understanding as to the reasons for the change of auditors.
“If the issuer does not authorize appropriate communications, or places significant limitations on the responses of its predecessor accounting firm, the new accounting firm may not be able to accept the engagement and be in compliance with applicable PCAOB standards,” Munter stated. “The same is true if the predecessor auditor creates roadblocks and fails to engage in appropriate communications or to provide requested information, including prior work papers.”
In his closing remarks, Munter further warned, “The failure of the retained lead auditor to meet any of its legal or professional obligations with respect to PCAOB inspection and investigative demands, or the failure of the lead auditor to comply with all applicable audit standards can result in significant liability for not only the auditor and its personnel, but also for the issuer.” Thus, such compliance violations should be avoided.
Accessibility to financial statements and work papers has historically been the biggest issue concerning Chinese public companies listed on U.S. securities exchanges, because of the Chinese government’s tendency to block access to audit reports. In August, the PCAOB reached an agreement with Chinese regulators that would grant the PCAOB complete access to the audit work papers, audit personnel, and other information needed to inspect and investigate public accounting firms headquartered in mainland China and Hong Kong. 
Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.