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PCAOB enlists in the trade war

The SEC and PCAOB jointly released a statement on the challenges they face with respect to access to China to regulate U.S. listed Chinese companies. There is nothing new in this statement, but it is noteworthy because of its existence and timing.

For those have not been following the issue, the PCAOB is mandated by Sarbanes-Oxley to inspect accounting firms that audit U.S. listed companies, including foreign accounting firms. When the PCAOB attempted to come to China to inspect firms (mainly local affiliates of the Big Four) auditing U.S. listed companies China blocked them on the basis of national sovereignty. Attempts to find alternatives also foundered on arguments that the working papers might contain state secrets. The PCAOB was also blocked from inspecting Hong Kong firms to the extent the work related to the mainland.

After the wave of frauds by U.S. listed Chinese companies in the past ten years, the SEC finally got fed up with the intransigence of the Big Four firms about producing their working papers and brought charges against the firms. The firms argued to a SEC administrative trial judge that they were caught between a rock and hard place, having to decide whether to break Chinese or American law, and the judge appropriately observed that if that were the case, it was only because the firms put themselves in that position when they decided to do U.S. audits for Chinese companies. The judge threw the book at the Big Four, and BDO. The firms appealed and settled with the SEC paying a $500,000 penalty each and promising not to sin again.

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