In Test Of China Secrecy Laws, Us Regulator Censures, Revokes Registration Of Hong Kong Accounting Firm
The Public Company Accounting Oversight Board (PCAOB) of the United States has censured and revoked the registration of PKF, an accounting partnership headquartered in Hong Kong. This means that PKF can no longer audit companies in Hong Kong and China that are listed or have issued securities in the US.
In the January 12, 2016 order, PCAOB said PKF failed to respond to an Accounting Board Demand requiring the firm to testify on topics related to its audit of an unnamed mainland Chinese company that had issued shares in the US.
PKF had argued that it could not testify without the PCAOB first making a request for assistance from the China Securities and Regulatory Commission (CSRC) and the country’s Ministry of Finance (MOF), under a 2013 Memorandum of Understanding between PCAOB and the two bodies. The accounting firm also said that either the CSRC or the MOF must give its approval before PKF can testify.
“Respondent’s reliance on the MOU was not a valid justification for refusing to provide testimony in a Board investigation,” PCAOB ruled.
“The MOU ‘sets forth the [parties’] intent with regard to mutual assistance and the exchange of information for the purpose of enforcing and securing compliance with the respective Laws and [r]egulations of [the parties’] jurisdictions….’ At the same time, the MOU states that it is ‘not intended to create legally binding obligations or … supersede domestic laws’ of the parties.
By its unequivocal terms, concludes PCAOB, “the MOU affords Respondent no legal rights. What the MOU contemplates is that the parties to the agreement will use the mechanisms provided in the MOU in appropriate circumstances.”
PKF, which had resigned as auditor of the Chinese entity a year before the PCAOB started its formal investigation, is not contesting its censure and deregistration. The PCAOB’s interpretation of the MOU is therefore still untested from the Chinese side.
But for now, other accounting firms that plan to rely on a similar interpretation as PKF of the MOU’s provisions to avoid complying with an Accounting Board Demand have been put on notice that they risk being censured and deregistered. Affiliates of the Big Four firms and other international accountants are said to have received Accounting Board Demands as well.
Accounting professionals and the US-registered Chinese companies they audit will be closely watching developments – and the response of Chinese authorities should these firms testify without the approval of the CSRC or the MOF. The fear is that accounting firms may be held liable for violating China’s security laws should they testify without the go-ahead from these bodies.