There may be a beginning to the end of the battle between
U.S. and Chinese regulators over audit work papers relating to People's Republic
of China (PRC)-based firms. The Public Accounting Oversight Board (PCAOB) announced
a memorandum of understanding ( MOU) with its Chinese counterparts which
promises to make audit work papers available on request.
The PCAOB and the China Securities Regulatory Commission
or CSRC and the Ministry of Finance in China or MoF executed a Memorandum of
Understanding on Enforcement Cooperation. Essentially, the agreement provides
for the exchange of certain materials on request to assist in the enforcement
of the laws of the parties to the agreement. In the MOU the parties pledge the
"fullest assistance permissible to secure compliance with the respective Laws
and Regulations of the Authorities."
The assistance available under the MOU is defined to
include furnishing "information and documents held in the files of the
Requesting Party." It also includes the exchange of documents which relate to:
Professional services -
those "documents sufficient to identify all audit review or other professional
services related to . . . " the request;
Work papers - "audit working
papers or other documents held by audit firms . . . "
Systems - "documents
sufficient to identify firms' quality control systems including organizational
structures, policies adopted and procedures established to provide assurance of
compliance with professional standards."
The request may be denied where it would require the
"Requested Party to act in a manner that would violate law . . . " or on
grounds of "public interest or essential national interest . . . " The
agreement does not provide for inspections as called for by the Sarbanes-Oxley
Act. That is a point of continuing discussion.
The MOU comes at a critical point. The SEC has three
pending actions focused on the question. One is a subpoena enforcement action
against the PRC affiliate of Deloitte. It seeks the production of audit work
papers relating to a Chinese issuer. SEC v. Deloitte Touche Tohmasu CPA,
Ltd., Case No. 11-mc-512 (D.D.C.). The second is a proceeding against the
same firm relating to a different audit. The proceeding is based on SEC Rule of
Practice 102(e). It seeks an order which would preclude the firm from appearing
and practicing before the Commission. Such an order it would effectively bar
the firm from auditing a U.S. public company. In the Matter of Deloitte Touche
Tohmatsu Certified Public Accountants, Ltd., Adm. Proc. File No. 3-14872
(Filed May 9, 2012). Finally, there is the so-called "industry wide" proceeding
against the PRC based affiliates of five international accounting firms. In
the Matter of BDO China Dahua CPA Co., Ltd., Adm. Proc. File No. 3-15116
(Filed Dec. 3, 2012). It is also based on Rule 102(e) and seeks the same relief
as the proceeding against the Deloitte affiliate.
If effective, the agreement provides a framework for the
production of audit work papers. The production of those papers would permit
firms to comply with their obligations under Sarbanes-Oxley which requires that
PCAOB registered audit firms produce audit work papers on request. Accordingly,
the MOU has the potential to resolve the pending actions. While the agreement
offers this promise, and the prospect of a future arrangement on inspections,
implementation is critical. Ultimately the MOU may also hold the key to the
world capital markets for PRC based enterprises - the kind of transparency
sought by the agreement is critical to such access. For now, however, the MOU
is a step in the right direction.
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For more commentary on developing securities
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