On Friday, the Chair of the Securities and Exchange Commission Jay Clayton, the Commission’s Chief Accountant Wes Bricker, and the Chairman of the PCAOB William Duhnke issued a statement reaffirming the significance to the capital markets of high quality and reliable financial statements, which, in turn, depend on the reliability of financial statements, quality audit services and effective regulatory oversight. The statement notes the particular responsibility of U.S. regulatory agencies in monitoring audit-related information and in overseeing the regulatory framework for financial reporting. The statement notes that U.S.-listed companies accounted for approximately 40% of the market capitalization of global public companies in 2017.
The Chairs of the Commission and the PCAOB and the Chief Accountant noted the formal cooperative arrangements that are in place between the Commission and foreign regulators and enforcement agencies, as well as the cooperative agreements in place between the PCAOB and foreign regulators allowing for the PCAOB to conduct joint inspections with such regulators or providing for the sharing of information. Perhaps because of the increase in the number of China-based IPOs, the remarks focus on difficulties associated with obtaining access to information that would allow the PCAOB to do its work. The remarks note that the laws of various countries include blocking statutes and data protection, privacy, confidentiality, bank secrecy, state secrecy, and national security laws that may create obstacles to cross-border flows of information between regulators and foreign-domiciled registrants. In addition, the statement notes that the positions taken by some foreign authorities currently prevent or impair the PCAOB’s ability to inspect non-U.S. audit firms in certain countries. The remarks then go on to address the issues affecting China-based companies:
“The Commission and the PCAOB currently face significant challenges in overseeing the financial reporting for U.S.-listed companies whose operations are based in China. The business books and records related to transactions and events occurring within China are required by Chinese law to be kept and maintained there. China also restricts the auditor’s documentation of work performed in the country from being transferred out of China. China’s state security laws are invoked at times to limit U.S. regulators’ ability to oversee the financial reporting of U.S.-listed, China-based companies. In particular, Chinese laws governing the protection of state secrets and national security have been invoked to limit foreign access to China-based business books and records and audit work papers. As a result, for certain China-based companies listed on U.S. stock exchanges, the SEC and PCAOB have not had access to the books and records and audit work papers to an extent consistent with other jurisdictions both in scope and timing.”
The statement also alerts market participants that the PCAOB publishes on its website a list of companies whose auditors are located in jurisdictions where there are obstacles to PCAOB inspections, which currently includes 224 issuers of which 213 have auditors based in China or Hong Kong. The statement concludes with an expression of frustration regarding the inability to have made more progress in reaching agreements with China that would provide the Commission and the PCAOB access to the information needed for information sharing, inspections, and oversight. Finally, the Chairs and the Chief Accountant note that the failure to enter into such arrangements results in investor protection issues. In order to address these investor protection issues, the Commission may be required to adopt measures mandating additional disclosures or even to restrict new issuances.