I have said that I think the most likely outcome should PCAOB negotiations with Chinese regulators fail is a rule-making proposal from the PCAOB that will move to deregister all firms it cannot inspect.
A reader has pointed out another option for the PCAOB. The PCAOB could begin the process of administering an administrative sanction against each individual firm that it cannot inspect. Under PCAOB Rule 5100, the PCAOB can issue a temporary suspension or a permanent revocation of the registration of firms it finds to have violated SEC or PCAOB rules and standards.
If this approach were taken, it is likely that the PCAOB would bring a separate action against each of the 9 mainland firms and 17 Hong Kong firms that issue reports on U.S. listed companies.
The problem with this approach is that it is unfair to investors and U.S. listed companies.
One of the big problems with the PCAOB is that Sarbanes-Oxley provides that investigations of registered accounting firms are confidential. The PCAOB cannot advise the public that a firm is under investigation. The public is only informed when the disciplinary action is made public at its conclusion. Because firms can delay the final disciplinary action through appeals and other tactics, it may be years before the public is made aware that there is a problem. During this period investors may continue to rely on audits that the PCAOB has determined are defective, since auditors may continue to issue audit reports while the disciplinary process works its way through the system.
I strongly favor that the PCOAB proceed through a rule-making process, rather than a disciplinary process. A rule-making process provides full transparency, and allows all constituents to participate in the decision. Companies and investors will have adequate information to consider alternatives as the rule proceeds through its process. The disciplinary process is opaque, and when the results become public the firms may be instantly deregistered, and investors and clients will have no opportunity to make alternative arrangements.