Shifting tide of audit compliance for US listings

By Willow Wei, Dentons China
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A number of Chinese companies listed on the New York Stock Exchange recently issued announcements of delisting. One of the reasons was that the US Securities and Exchange Commission (SEC) could not inspect audit working papers of mainland China or Hong Kong-based auditing firms engaged by such companies. Unable to meet the SEC requirements on audit compliance, these companies may face delisting or privatisation.

Steps are now underway to resolve the issue, with the China Securities Regulatory Commission (CSRC) signing an Audit Oversight Co-operation Agreement on 26 August 2022 with US regulators and China’s Ministry of Finance (MoF). The website announcement also included answers from CSRC officials to media questions regarding the agreement.

On the same day, the US Public Company Accounting Oversight Board (PCAOB) chair, Erica Williams, signed a statement of protocol with the CSRC and MoF.

This clears the way for the PCAOB to inspect and investigate registered public accounting firms in mainland China and Hong Kong, and represents a positive step towards co-operative resolution of the audit review dilemma between regulators on both sides.


Willow Wei, Dentons China
Willow Wei
Dentons China
Tel: +86 21 3872 2339

According to the Sarbanes–Oxley Act (SOX) of 2002, the PCAOB has the right to inspect auditors and related information, as well as examine if the issuer’s audit report is in compliance with the SOX and US securities law.

On 8 December 2020, the US Congress enacted the Holding Foreign Companies Accountable Act (HFCAA), which amended the SOX to further require issuers to disclose information on foreign jurisdictions that prevent the PCAOB from inspecting registered accounting firms.

Under the HFCAA, the SEC may ban a company from trading its stock on a US exchange or over-the-counter market if it cannot be inspected by the PCAOB for three consecutive years from 2021.

Subsequently, on 22 June 2021, the US Senate passed the Accelerating the Holding Foreign Companies Accountable Act (AHFCAA) which, if passed by Congress, will shorten the three-year limit to two years.

Finally, the PCAOB issued a determination report on 16 December 2021 stating that it was unable to inspect or investigate registered public accounting firms headquartered in mainland China or Hong Kong, followed by a list of such firms in the appendices.


At present, issuers seeking to list in the US are required by the SEC to disclose in form F-1 or S-1 (SEC forms) whether their registered accounting firm is listed by the PCAOB determination report. If so, the prospective issuer needs to change its accounting/audit firm to one that does enable PCAOB access and inspection.

As required by the HFCAA and PCAOB, the following information should be included in SEC forms prepared by prospective US issuers: (1) in which country and city the engaged accounting firm is headquartered, and whether it has passed a PCAOB regular inspection; and (2) whether the accounting firm is subject to the PCAOB determination report.

As noted, under HFCAA and PCAOB requirements, if the PCAOB cannot examine and inspect the engaged accounting firm for three consecutive years, the issuer’s stock may be banned. If the latest AHFCAA is passed by Congress, the limit of non-inspection by the PCAOB will be reduced from three consecutive years to two. Together, these legal and regulatory changes add to uncertainties over the prospect of listing and trading in the US.

Prior to the PCAOB’s statement of protocol, companies intending to list in the US but with accounting firms effectively blacklisted by the PCAOB would in many cases disclose their intention to switch to an accounting firm not headquartered in mainland China or Hong Kong, so as to meet the regulatory requirements.


In the PCAOB statement of protocol, chair Williams says that, on paper, the agreement grants the PCAOB complete access to the audit work papers, audit personnel and other information it needs to inspect and investigate any firm it chooses, with no loopholes and no exceptions.

But the real test will be whether the words agreed on paper translate to complete access in practice. The PCAOB will need to actively follow up to ensure meaningful implementation.

Companies seeking to list in the US will certainly need to thoroughly disclose current status of audit compliance in the SEC forms. Under relevant SEC form sections such as “risk factors”, they will be further required to disclose China’s latest legal developments.

These relevant factors likely include provisions currently drafted for comment such as: the CSRC Provisions on Strengthening Confidentiality and File Management Related to Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comment), issued on 2 April 2022; the State Council Provisions on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comment) issued on 24 December 2021; and the CSRC’s Filing Measures for Overseas Offering and Listing by Domestic Companies (Draft for Comments), also issued on 24 December 2021.

Accordingly, companies seeking to list in the US are advised to remain watchful of relevant updates and thoroughly disclose all related PCAOB regulatory policies, and China’s legal developments, in their SEC forms. If practical, they should engage auditing firms recognised by the PCAOB and SEC in order to meet their regulatory requirements.

Willow Wei is a partner at Dentons China. She can be contacted on +86 21 3872 2339 or by email at

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