United States: PCAOB’s Vacating 2021 Determination under HFCAA Lowers the Risk of Delisting

By: Yuki Sako and Michael G. Lee

On 15 December 2022, the Public Company Accounting Oversight Board (PCAOB) announced that it was able to secure complete access to inspect and investigate audit firms in China. From September to November 2022, PCAOB staff members “conducted on-site inspections and investigations in Hong Kong…thoroughly testing all aspects of the agreement necessary to assess whether [Chinese] Authorities would allow complete access.” The PCAOB’s inspections and investigations were pursuant to a written agreement, called the Statement of Protocol, which the PCAOB entered into with Chinese authorities on August 26, 2022. The PCAOB concluded that Chinese authorities “did not obstruct the PCAOB’s ability to inspect and investigate completely, consistent with U.S. law.” Consequently, the PCAOB decided to vacate its previous December 16, 2021 determination, made pursuant to the Holding Foreign Companies Accountable Act (HFCAA), that positions taken by China prevented the PCAOB from inspecting and investigating firms headquartered in mainland China and Hong Kong completely.

To date, the Securities and Exchange Commission (SEC) had conclusively identified over 170 companies as issuers that have retained public accounting firms with a branch or office located in a foreign jurisdiction that the PCAOB determines it is unable to inspect or investigate completely because of a position taken by a governmental entity in that jurisdiction (Commission-Identified Issuers).  The SEC has not changed its determinations as of today.  However, with the PCAOB’s vacating its 2021 determination, the ultimate risk these Commission-Identified Issuers will be subject to the HFCAA trading prohibition appears to be lower now. Nonetheless, SEC Chair Gary Gensler and the PCAOB have cautioned that the situation could still change.

Chair Gensler warned that Chinese authorities needed to ensure that the PCAOB continues to have full access for inspections and investigations in 2023 and beyond, and that the PCAOB would need to determine annually as such. Further, should Chinese authorities not allow the PCAOB complete access for inspections and investigations for three consecutive years, the SEC would prohibit trading in the securities of issuers engaging those audit firms, as required under the HFCAA.

Chair Gensler also noted that, separate from the implementation of the HFCAA, SEC staff have been looking into requiring additional disclosures from Chinese-based companies regarding their corporate structures, including whether a company is a variable interest entity and whether it distributes cash to offshore companies that could be available to investors.

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