The US Public Company Accounting Supervisory Board (PCAOB) recently released a report confirming that the inspection and investigation of accounting firms in mainland China and Hong Kong can be completed in 2022 and revoke the recognition made in 2021.

The China Securities Regulatory Commission (CSRC) answered questions on the progress of Sino-US cooperation in audit supervision on December 16. A spokesman for the China Securities Regulatory Commission said it took note of the report and public statements issued by the United States. The China Securities Regulatory Commission has always advocated to solve the problem of cross-border listing audit supervision through regulatory cooperation mechanism. practice has proved that as long as the two sides uphold the spirit of mutual respect and professional and pragmatic cooperation, we will be able to find a feasible cooperation path that meets their respective legal and regulatory requirements.

Welcome the re-determination by US regulators

On the morning of December 15, local time, the Accounting Supervisory Board of Public companies of the United States (PCAOB) issued a report confirming that the inspection and investigation of accounting firms in mainland China and Hong Kong could be completed in 2022, and the determination of relevant firms made in 2021 could be revoked. The market generally believes that this marks the positive results of Sino-US audit regulatory cooperation and releases a positive signal for the listing of Chinese enterprises in the United States.

The China Securities Regulatory Commission (CSRC), the Ministry of Finance and the US PCAOB signed a Sino-US agreement on audit supervision cooperation on Aug. 26, 2022, bringing the inspection and investigation of relevant accounting firms into the framework of bilateral regulatory cooperation, the CSRC said. Since the signing of the cooperation agreement, the regulatory bodies of the two sides have strictly implemented the relevant agreements of their respective laws and regulations and agreements, and have cooperated to carry out a series of fruitful inspection and investigation activities, and all work is progressing smoothly. In the course of cooperation, the two sides fully communicated and coordinated the plans for inspection and investigation activities, and the US side obtained audit manuscripts and other documents through the Chinese regulatory authorities, and conducted interviews and inquiries with relevant personnel of accounting firms with the participation and assistance of the Chinese side. The Chinese side abides by laws and regulations and, with reference to international practice, has specially dealt with specific data such as personal information contained in the manuscripts involved in the inspection and investigation in accordance with the provisions of the cooperation agreement, while both parties perform their regulatory duties in accordance with the law, it meets the requirements of relevant laws and regulations for information security protection.

"We welcome the re-determination made by US regulators based on regulatory professional considerations. The China Securities Regulatory Commission said that it looks forward to working with US regulators to continue to promote annual audit regulatory cooperation in the future on the basis of summing up previous cooperation experience, respect each other, enhance mutual trust, and form a regular and sustainable cooperation mechanism. work together to create a more stable and predictable international regulatory environment and safeguard the legitimate rights and interests of global investors in accordance with the law.

The Cooperation path under the Framework of Sino-US Agreement on Audit Supervision Cooperation

In August this year, China and the United States signed an agreement on cooperation in audit supervision, which includes three key aspects: first, to establish the principle of reciprocity. The terms of the agreement shall be equally binding on both parties. Both China and the United States may, in accordance with their statutory duties, inspect and investigate the relevant firms within the jurisdiction of the other party, and the requested Party shall try its best to provide adequate assistance to the extent permitted by law. The second is to clarify the scope of cooperation. The scope of the cooperation agreement includes assisting the other party in the inspection and investigation of the relevant firms. Among them, the scope of assistance provided by the Chinese side also covers some Hong Kong firms that provide audit services for Chinese stocks and the audit manuscripts are kept in the mainland. The third is to make clear the way of cooperation. The two sides will communicate and coordinate the inspection and investigation activities in advance, and the US side shall obtain audit manuscripts and other documents through the Chinese regulatory authorities, and conduct interviews and inquiries with relevant personnel of accounting firms with the participation and assistance of China.

According to several media reports, the Accounting Supervisory Board of listed companies (PCAOB) issued an announcement on its website, announcing that it was the first time in history that it had successfully reviewed the draft of an accounting firm with US-listed companies. It is reported that PCAOB Chairman Erica Williams confirmed at a press conference that with the completion of this review, the countdown to "delisting" will also be reset.

According to the regulatory cooperation agreement, the supervision of accounting firms will involve audit working papers. Taking daily inspection as an example, regulators not only check the internal control system of accounting firms, but also need to spot check the audit working papers of some listed companies in order to test the quality of the work of accounting firms. The audit working paper is the "work record" of the audit plan, the audit procedure, the relevant audit evidence and the audit conclusion made by the firm in the process of carrying out the audit. The main function of the audit working paper is to record whether the auditor dutifully verifies the accuracy of financial information such as income and expenditure in accordance with audit standards, so it generally does not include sensitive information such as state secrets, personal privacy or underlying data of the enterprise.

The direct object of audit supervision is the accounting firms, not the listed companies they audit. From the international practice of cross-border audit regulatory cooperation, listed regulatory agencies generally select some accounting firms for inspection every year, and spot-check the representative or potential audit quality risk audit projects among the listed companies audited by the inspected firms to verify, in order to evaluate the audit quality of the firms. The same is true for Sino-US audit regulatory cooperation, there is no need to inspect all audit projects of listed companies in the United States every year.