The US-China Audit Oversight Dispute: Causes, Solutions, and Implications for Hong Kong
(2021) 54(1) The International Lawyer 151-199
33 Pages Posted: 26 Nov 2020 Last revised: 31 Mar 2021
Date Written: October 8, 2020
The U.S. audit regulator, PCAOB, has extraterritorial oversight power over all accounting firms that audit U.S.-listed companies, including that of foreign accounting firms. This put it in conflict with foreign audit regulators due to sovereignty and conflict of law issues. Today China remains to prevent its accounting firms to be inspected by the PCAOB, although most other jurisdictions have resolved their differences with the U.S. regulator. This dispute between the U.S. and China had led to lawsuits, warnings, and potential bill to de-list all Chinese companies. This article examines the U.S. audit oversight regime and its inspection practices, the law of China that prevent foreign access to audit documents, as well as the court cases that arose out of the dispute. The reasons for the reluctance of the Chinese side to cooperate are found to be multi-folded, from legal restriction, administrative hurdle, regulatory standard differences, enforcement resources constraints, to a political preference for sovereign rights and national control. As another major listing destination for Chinese companies, Hong Kong has also encountered difficulties with access to Chinese audit documents but has taken a different approach to solving them. This article proposes various policy options to cope with the dispute over cross-border audit oversight, including sidestepping the legal issue over approval of state secrets by first asking the audit firm to prove the factual existence of state secrets, categorizing the Chinese companies into different groups with different treatments, exploring other forms of cooperative arrangements based on the Hong Kong experience or even using Hong Kong as a proxy for oversight.
Keywords: Cross-border audit oversight, audit working paper, cross-listing, Chinese Concept Stocks, securities regulatory cooperation, PCAOB
JEL Classification: G15, K22
Suggested Citation: Suggested Citation