Securities Regulation Daily PCAOB staff responds to questions about audits of Mainland China issuers
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Tuesday, January 3, 2017

PCAOB staff responds to questions about audits of Mainland China issuers

The PCAOB staff has responded to questions from registered public accounting firms about the Chinese Ministry of Finance’s interim provisions on auditing operations related to the conduct of auditors based outside of Mainland China that perform audit work in Mainland China. China’s provisions were put into effect in 2015.

Cooperation requirements. The staff advised that the provisions do not have any effect on a firm’s obligations to provide audit documentation and other information in connection with PCAOB inspections and investigations. The Board expects firms to provide work papers or other information as requested "completely and unconditionally" by the prescribed deadline. It is up to the accounting firm whether to disclose the Board’s demand to foreign authorities.

Non-U.S. legal obstacles do not create an exception to the firm’s obligation to provide documents to the Board, and they are not a defense to a disciplinary action for noncooperation, which may include the revocation of the firm’s registration. The Board noted that the SEC has affirmed that a violation of Rule 4006—the failure or refusal to provide requested information—does not depend on establishing a particular state of mind, and that "impossibility" is not a defense. The staff added that the PCAOB has revoked a firm’s registration based on its refusal to provide information in a PCAOB investigation in which it cited China’s restrictions that predated the 2015 provisions.

A firm should not expect any relief from the obligation to comply with Board demands for documents or other information, regardless of the circumstances, according to the staff. Firms should bear this obligation in mind when they consider whether to accept or continue an engagement.

Role of non-U.S. firms. If a firm carries out an audit in cooperation with a non-U.S. accounting firm, whether that firm must be registered with the PCAOB depends on the role it plays in the audit. If its role meets or exceeds the substantial role threshold in the Board’s rules, then the participating non-U.S. firm must be registered with the Board.

The staff also addressed a firm’s conduct with respect to the role of a participating non-U.S. auditor. Depending on the nature of the other firm’s participation, the rules which may govern the firm’s conduct are AS 1201, Supervision of the Audit Engagement, or AS 1205, Part of the Audit Performed by Other Independent Auditors. The staff added that the firm should be mindful of compliance with other auditing standards and independence requirements as well.

Document retention requirements. The staff advised that a firm’s document retention requirements would not be satisfied if the audit documents are retained by the participating non-U.S. auditor. The documentation must be retained by the office that issues the audit report. It is not sufficient that the documentation be accessible to that office.

Reporting requirements. The participation of any other firm, whether U.S. or non-U.S., gives rise to reporting obligations. The participation of a non-U.S. firm also gives rise to statutory obligations under the federal securities laws with respect to the production of documents to the Board and to the SEC. Firms that issue audit reports for issuers must disclose certain information about the audit on PCAOB Form AP, beginning with audit reports issued on or after June 30, 2017.

A firm is also subject to certain obligations when it relies to any extent on the work of a non-U.S. accounting firm, including an unregistered firm, in issuing an audit report, performing audit work, or conducting an interim review. The firm must produce the non-U.S. firm’s work papers and other documents as requested by the Board or the SEC. It also must secure, as a condition to being able to rely on the non-U.S. firm’s work, that firm’s agreement to produce the requested documents.

Sarbanes-Oxley Act. The Sarbanes-Oxley Act subjects non-U.S. firms to the jurisdiction of the U.S. courts for purposes of enforcing any document requests. The Act also requires non-U.S. firms to designate an agent in the U.S. to accept service of process.

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