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PCAOB bans Crowe Horwath

The PCAOB has revoked the registration of Hong Kong based Crowe Horwath for refusing to cooperate with document requests related to inspections.  Crowe Horwath argued that Chinese regulators forbid it from providing these documents directly to the PCAOB. The PCAOB had reached an agreement in 2013 with Chinese regulators for document production in the case of enforcement actions, but no agreement has been reached with respect to inspections. 

The PCAOB was set up as an independent audit regulator by the Sarbanes Oxley Act.  It has three primary functions; It sets standards for auditing of US listed companies, it inspects auditors work to determine whether the standards are followed, and it enforces instances of non-compliance. Inspections are the most important function.  All auditors of US listed companies, including foreign auditors are inspected at least every three years, with the largest auditors inspected annually.  

Soon after the PCAOB began international inspections over a decade ago, China balked at allowing inspections of Chinese firms citing national sovereignty and national secrecy concerns. China also forbade the PCAOB from inspecting firms based in Hong Kong to the extent the audits related to mainland companies.  

Accounting and the negative list

China has long restricted foreign investment in sensitive sectors of its economy.  These restrictions appear to have had two primary motivations – protecting state security and social stability, and protecting state owned enterprises from foreign competition. The former has led to keeping foreigners out of media, internet, and defense sensitive sectors. Restrictions protecting SOEs from foreign competition were largely negotiated away during China’s accession to WTO.

Investments were categorized as to encouraged, restricted and prohibited. In 2015 China began a move towards a negative list – investment is allowed unless a sector is on the negative list.  China has just released a new negative list for its 11 free trade zones that goes into effect on July 10, 2017.

Accounting was initially off limits to foreign investment. The international accounting firms entered in the early 1980s through representative offices that were not allowed to practice. In the early 1990s they were permitted to enter joint ventures with state-controlled CPA firms. In the late 1990s the state-controlled CPA firms were separated from the state. In the early 2010s the Big Four restructured into special general partnerships (SGP) that allowed up to 20% ownership by unlicensed foreign partners (started at 40% and phased down). 

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