PCAOB Enters into Enforcement Cooperation Agreement with Chinese Regulators

The Public Company Accounting Oversight Board recently announced that it has entered into a Memorandum of Understanding (MOU) on Enforcement Cooperation with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance (MOF).

According to the PCAOB:  The MOU establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in both countries’ respective jurisdictions.  More specifically, it provides a mechanism for the parties to request and receive from each other assistance in obtaining documents and information in furtherance of their investigative duties.

“This agreement with China is an important step toward cross-border enforcement cooperation that is necessary to protect the interests of investors in U.S. capital markets,” said PCAOB Chairman James R. Doty.

“We look forward to continued progress with our Chinese counterparts to reach an agreement on cross-border inspections of PCAOB-registered firms as well,” he said.

In addition to developing an enforcement MOU, the PCAOB has been engaged in continuing discussions with the CSRC and MOF to permit joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

Under the Sarbanes-Oxley Act, the PCAOB oversees all accounting firms that audit public companies whose securities trade in U.S. markets. Approximately 47 audit firms in China are registered with the PCAOB.

The MOU is available on the PCAOB website.

According to Weinberg & Company:

While a positive step, some issues still remain, including:

*    Under the MOU, some documents can still be   withheld if China declares them state secrets.

*    No agreement was reached that would allow regulatory inspections, which are the most important function of the PCAOB, to verify the performance and compliance with accounting rules.

*    The agreement does not fully involve the U.S. Securities and Exchange Commission (SEC)

The SEC filed lawsuits against several U.S. traded Chinese companies for fraud and late last year filed legal action against the Chinese affiliates of five major accounting firms demanding they follow U.S. law. Those accounting firms have refused to provide documents to the SEC citing Chinese law that threatens their employees with jail for releasing documents without permission from Beijing. An SEC Administrative Judge will rule on that matter later this year and could strip those audit firms of their ability to audit U.S. traded companies.  “Simply Stated, June 2013”

We have previously blogged about this issue and will continue to keep all of you apprised of any developments.

Although we assisted in a number of Chinese companies going public in the U.S., all went public using our Go Public Direct Method and all have avoided the issues that plagued Chinese companies that went public with reverse mergers.

We continue to encourage any company or their advisors considering going public in the US to contact us first to discuss how a Go Public Direct transaction rather than a reverse merger with a public shell would in most cases be a preferable alternative.