On August 26, 2022, the Public Company Accounting Oversight Board (PCAOB) signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China (PRC) that serves as a first step toward permitting the PCAOB to conduct inspections and investigations of China- and Hong Kong-based audit firms in a manner consistent with U.S. law.

The Holding Foreign Companies Accountable Act (HFCA Act), an amendment to the Sarbanes-Oxley Act of 2002, was signed into law on December 18, 2020 to address concerns over audit inspections of China-based companies trading in the United States. Specifically, the HFCA Act requires the SEC to identify all issuers subject to the periodic reporting requirements of the Securities Exchange Act of 1934 whose audited financial reports are prepared by an accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect due to a position taken by an authority in that jurisdiction. If the PCAOB is unable to inspect the issuer’s auditor for three consecutive years, the issuer will be prohibited from having its securities listed for trading on a U.S. exchange or otherwise traded in over-the-counter markets subject to the jurisdiction of the SEC.

The HFCA Act requires the PCAOB to determine whether authorities in a foreign jurisdiction have taken positions that prevent the PCAOB from inspecting or investigating “completely” PCAOB-registered public accounting firms in that jurisdiction. More than 50 foreign jurisdictions currently comply with PCAOB inspection requirements. However, in 2021 the PCAOB determined that PRC authorities had taken positions that would prevent the PCAOB from inspecting and investigating completely audit firms in China and Hong Kong.

Pursuant to the Statement of Protocol, the PCAOB and the PRC have created a framework that may allow for compliance with the HFCA Act, which could allow approximately 200 China-based issuers to avoid being delisted in the United States. The PCAOB will reassess its determination relating to China and Hong Kong before the end of 2022. The PCAOB intends to have inspectors conducting on-site inspections and investigations of audit firms in China and Hong Kong by mid-September 2022 and will base its determination on the ability of its inspectors to obtain full and timely access to information as required by U.S. law.

The SEC’s fact sheet pertaining to the Statement of Protocol is available here. The PCAOB’s fact sheet is available here. A related statement from SEC Chair Gary Gensler is available here.