On July 9, 2020, SEC Chief Accountant Sagar Teotia and SEC Division of Enforcement Co-Director Stephanie Avakian moderated a panel discussion concerning limitations on inspection and enforcement in emerging markets, and auditors’ oversight of members firms in emerging markets. This was Panel 2 of the SEC staff’s roundtable on emerging markets and comprised of PCAOB Chairman William Duhnke III, Center for Audit Quality executive director Julie Bell Lindsay, Simpson Thacher partner Cheryl Scarboro and U.S. DOJ Fraud Section Chief Robert Zink.
PCAOB Chair Duhnke reported that currently, the PCAOB is unable to conduct audit inspections in China, Hong Kong, France, and Belgium. The PCAOB is finalizing the renewal of cooperation agreements with France and Belgium and is just awaiting final approval (which should be forthcoming) from data protection authorities in accordance with the EU’s General Data Protection Regulation. In the case of China and Hong Kong, however, the PCAOB is blocked from conducting inspections, and discussions with Chinese authorities have not led to any firm or final agreement. Chair Duhnke mentioned that there are 17 PCAOB-registered firms in mainland China and Hong Kong that sign audit reports for U.S. issuers. As of May 31, 2020, the work of these 17 firms relates to 195 public companies with a combined market capitalization of approximately $1.7 trillion, with the 10 largest companies having a combined market cap of $1.3 trillion. He believes that further discussions by the PCAOB with the Chinese authorities on access are unlikely to be productive unless and until the latter are able to embrace the core principles of the PCAOB fundamental to its mission, including its ability to conduct inspections and investigations consistent with its mandate, select and audit work papers, review potential violations, and have access to firm personnel, audit papers, and other relevant information and documents. He also observed that a 2013 enforcement cooperation MOU between the PCAOB and China has been ineffective, as Chinese authorities have, in many cases, not produced requested documents in a timely manner, if at all, and have prevented the PCAOB from interviewing witnesses located in China. As another example, the PCAOB chair mentioned that Chinese authorities have consistently stated that the PCAOB cannot inspect the audit of Chinese state-owned enterprises, despite the fact that those enterprises have shares listed on U.S. exchanges. Chinese authorities have also made clear their intention to redact or refuse access to audit papers in a way that makes the PCAOB unable to complete inspections.
Center for Audit Quality director Lindsay noted that the Center’s governing board includes the Big 4 accounting firms, as well as other global audit firms. Global audit firms are structured as networks of individually, locally-owned and operated firms called member firms, that operate as one brand globally, but are separate and distinct legal entities. A global entity enforces quality control standards across member firms. To ensure audit quality, particularly with respect to global audits, each member firm conducts its own internal inspection process and programs, as well as specific training in SEC and PCAOB standards with respect to U.S. issuers and SEC registrants that are outside the U.S. Moreover, any audit of an SEC registrant must be done in accordance with PCAOB standards and regulations, including engagement quality controls and supervision of auditors who participate in audits, and oversight of component work. She said the CAQ and public accounting firms hope for the resolution of the ongoing issue between the U.S. and Chinese authorities, so that audit quality will not suffer.
The other panelists shared the difficulties and obstacles associated with bringing and enforcing actions against non-U.S. companies and persons such as, company officers and directors in emerging markets, including China. These include, among others, challenges in obtaining information needed for investigations and litigation, recognition and enforcement of foreign judgments, non-cooperation, veracity and reliability of gathered documents and information, application of evidentiary matters, and other issues. For instance, China has recently passed a law that prohibits any entity or individual in China from providing documents or information relating to securities business activities to overseas regulators without approval of Chinese securities regulators and components of the Chinese government. There also similar state secrecy and data protection laws in China.
A webcast archive of the panel discussion will be available on the SEC website.