CSRC Officials Answered Reporter Questions regarding China-U.S. Audit Oversight Cooperation Agreement



1.Question: What is the significance of signing the China-U.S. audit oversight cooperation agreement

Answer: The China-U.S. audit oversight cooperation agreement is an important first step by both sides to resolve issues concerning audit oversight cooperation. The agreement establishes a framework for regulators from both countries to carry out regulatory cooperation in inspecting and investigating audit firms within their jurisdiction in accordance with applicable laws. The agreement, in line with common practices in global capital markets, has laid the foundation for reciprocal and efficient cooperation between the two sides in compliance with domestic laws and regulatory requirements. The cooperation will help improve audit quality, protect investors, and build a benign regulatory environment for companies to list on overseas markets in accordance with laws and regulations.

2. Question: What are the main contents of the China-U.S. audit oversight cooperation agreement?

Answer: Building on the 2013 memorandum of understanding on enforcement cooperation and the 2016 memorandum of cooperation on pilot inspection, both sides have conducted extensive consultation to reach the agreement, following respective laws, regulations and regulatory mandates and taking experience from international common practices and past cooperation between both sides. The agreement sets forth arrangements for both sides to cooperate in conducting inspections and investigations of relevant audit firms, and specifies the purpose, scope and approach of cooperation, as well as the use of information and protection of specific types of data.

Main contents of the agreement are as follows. First, the principle of reciprocity. The agreement is equally binding on both sides. Regulators from both China and the U.S. can conduct inspections and investigations of relevant audit firms in the other’s jurisdiction pursuant to their statutory mandates, and the requested authority shall provide assistance to the fullest extent permitted by applicable laws. Second, the scope of cooperation. The scope of cooperation under the agreement includes assisting with the inspections and investigations of relevant audit firms taken by the authorities. The assistance by the Chinese side also covers inspections and investigations of certain audit firms located in Hong Kong SAR to the extent that they audit Chinese companies listed in the U.S. and maintain audit work papers of such engagements in the Chinese mainland as required by relevant regulations. Third, approach of cooperation. The two sides will communicate and coordinate in advance to plan for inspections and investigations. The materials such as audit work papers that the U.S. regulator need access to will be obtained by and transferred through the Chinese side. The Chinese side will also take part in and assist in the interviews and testimonies of relevant personnel of audit firms requested by the U.S. side.

3. Question: What is the purpose of cross-border audit oversight cooperation?

Answer: Securities issuers in capital markets are obligated to periodically disclose financial reports so that investors can make informed decisions. It is required by laws and regulations in any country that the financial reports of public companies shall be audited by audit firms, and such audit firms shall be held to the oversight of competent regulators to ensure that they fulfill their duty as “gatekeepers” in improving disclosure quality and protecting investors’ legitimate interests.

An audit firm that audits a company listed in an overseas market shall, generally speaking, register with the regulator of the company’s listing venue, and be subject to its oversight. As these audit firms may be located in different jurisdictions around the world, it is common practice that the audit oversight body of the listing venue establishes cooperative mechanism with the auditor’s home regulator. Without effective audit oversight cooperation, it is difficult to guarantee such auditors’ compliance with regulatory requirements such as auditing standards; investors may cast doubt because of the lack of protection for the quality of companies’ financial reporting; and some companies may no longer be able to list and trade their securities overseas pursuant to laws of the listing venue.

With the deepening two-way opening-up of China’s capital markets, there are increasing activities of overseas listings and cross-border auditing services. Currently, there are more than 30 Chinese audit firms that are registered with the PCAOB and qualified to provide audit services to more than 200 Chinese companies listed on the U.S. capital markets. To execute its mandate over such firms, the PCAOB is required to establish oversight cooperation mechanism with its Chinese counterparts. Such mechanism is also needed for Chinese regulators’ oversight of U.S.-based auditors that fall within their jurisdiction. It is in line with international common practices, and is needed by both sides. Keeping Chinese companies listed on the U.S. markets is an all-win arrangement that benefits investors, issuers and both countries in general. This understanding forms common ground for both sides to negotiate and reach the agreement.

4. Question: What is the role of audit work papers in cross-border audit oversight cooperation?

Answer: The oversight of audit firms usually involves audit work papers. While inspecting an audit firm, aside from its internal control system, regulators also need to review the audit work papers of selected issuers to examine its audit quality. Audit work papers contain records of the planning and performance of the audit work, including the procedures performed, evidence obtained, and conclusions reached. The main function of audit work papers is to document whether or not an auditor has fulfilled its due diligence in verifying the accuracy of the financial records of a company, such as income and expenditure, based on applicable audit standards. Therefore, audit work papers generally do not contain state secrets, individual privacy, companies’ vast user data or other sensitive information.

It is worth noting that it is the audit firms, not the listed companies being inspected, that are subject to audit oversight. Pursuant to common practice in cross-border audit oversight cooperation, in order to assess the audit quality of these auditors, regulators of a listing venue normally select a portion of registered audit firms for annual inspection, and review selected audit engagements performed by the firm that are either of greater representativeness or at greater risk of potential audit deficiencies. This also applies to the audit oversight cooperation between China and the U.S.. Not every audit engagement of Chinese companies listed in the U.S. is inspected each year.

5. Question: Can sensitive information in audit work papers, if there is any, be properly protected under the agreement?

Answer: The enaction of Data Security Law, Personal Information Protection Law and other relevant laws and regulations of the PRC in the recent years clearly identifies the obligations of relevant entities on information security and provides a more operational guidance for them to follow. All companies, listed or not, are obligated to comply with laws and regulations of their home country.

The CSRC and relevant authorities revised the provisions on confidentiality and archives administration for overseas securities offering and listing, which set out clear requirements on information security regarding audit work papers. The document further strengthens the primary responsibility of listed companies on information security and lays out a clear and operable guidance for companies and accounting firms to store and handle state secrets and sensitive information in accordance with law. This will promote compliance in the preparation of audit work papers with accounting and auditing standards while ensuring information security.

The agreement between China and the U.S. puts inspections and investigations of relevant accounting firms under a cooperation framework. Both sides will have thorough communications in advance. Audit work papers and other information that the U.S. regulator need access to will be obtained by and transferred through Chinese regulators. Meanwhile, the agreement has also made clear arrangements on the treatment and use of possible sensitive information during audit oversight cooperation, including procedures for processing personal information and other certain data categories. It provides a feasible path for both sides to discharge their regulatory mandates while protecting relevant information.

6.Question: Does reaching audit oversight cooperation agreement remove the delisting risk of Chinese companies from U.S capital markets?

Answer: The signing of the agreement is an important step forward for both sides towards resolving the oversight issue of audits of Chinese companies through enhanced cooperation, as is hoped for and expected by the market. Going forward, both sides will carry out regular inspections and investigations of relevant audit firms in accordance with the agreement, and make objective assessments accordingly. If the upcoming cooperation concludes to the satisfaction of both sides’ regulatory mandates, it is hopeful that the audit oversight issue of the U.S.-listed Chinese companies will be resolved and delisting can be avoided. We remain committed to working with the U.S. regulators to proactively advance the cooperation in a professional and pragmatic manner to achieve positive results with joint efforts.

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