On June 9, 2009, the Public Company Accounting Oversight Board (PCAOB) rejected the application for registration by Zhonglei (HK) C.P.A. Limited (Zhonglei HK). Zhonglei HK had applied for registration on November 10, 2010. On October 7, 2010, the PCAOB announced that it would no longer register firms based in jurisdictions where the PCAOB was restricted from performing examinations. Following its policies, the PCAOB asked Zhonglei HK to state its understanding of whether a PCAOB inspection of Zhonglei would currently be allowed by law or authorities in Hong Kong, including Chinese Mainland authorities to the extent that the examination relates to work performed for issuers with mainland operations. Zhonglei HK responded that a PCAOB inspection would currently not be allowed by local law or local authorities. China has taken the position that PCAOB inspections would violate its national sovereignty.
Zhonglei HK was given the option to put its application in pending status without board action until such inspections would be allowed. The PCAOB has indicated it hopes to reach agreement on inspections this year. Zhonglei HK, however, rejected that option and asked the board to take action on the application and this action was the rejection. Perhaps Zhonglei HK was advised by mainland officials to seek the rejection – possibly to set up a confrontation over this issue. The company, however, indicates that it simply gave up.
Zhonglei HK is affiliated with Beijing based Zhonglei, China’s 17th largest accounting firm, which is part of the international network of firms known as Nexia. Zhonglei Beijing is already registered with the PCAOB. Each legal entity of an accounting firm needs to be registered with the PCAOB if they work on U.S. registrants, which is why Zhonglei was required to seek a separate registration for its Hong Kong firm. Zhonglei would be right to complain about the inconsistent application of this rule. According to the China Economic Review, New York based Marcum, Bernstein and Pinchuk claims to have a wholly foreign owned enterprise in China that employs around 75 staff, but this entity is not listed among PCAOB registered accounting firms.
It is unfair that the PCAOB is punishing new market entrants while allowing established firms to continue to do work while uninspected. It is especially unfair if the PCAOB does not insist that U.S. based firms that establish a China office play by the same rules.