SEC Lawyer Talks on China Reverse Merger Warnings

A joint Public Company Accounting Oversight Board (PCAOB) and Securities and Exchange Commission delegation is meeting this week in Beijing with representatives of China’s Ministry of Finance and the China Securities Regulatory Commission.  This follows recent SEC Investor warnings on Chinese Reverse Mergers.

China Reverse Merger

“This meeting is the commencement of our accelerated efforts with the People’s Republic of China to forge a cooperative resolution to cross-border auditing oversight. I believe we share a common objective with Chinese regulators to protect investors and safeguard audit quality through our mutual cooperation,” said James R. Doty, PCAOB Chairman. The delegation will meet with senior leadership of the Ministry of Finance and the CSRC.

“The purpose of this meeting is to provide an opportunity to exchange information about how each country conducts inspections of auditing firms and to move toward a bilateral agreement providing for joint inspections of China-based auditing firms registered with the PCAOB,” said PCAOB Board Member Ferguson.

The Sarbanes-Oxley Act of 2002 requires that all public companies whose securities trade on U.S. exchanges must use an audit firm that is registered with the PCAOB, regardless of where the public company and the audit firm are located. To date, the PCAOB has been blocked from conducting inspections of auditing firms in China due to sovereignty concerns raised by Chinese regulators.

Currently, PCAOB registrants include more than 900 non-U.S. auditing firms from 87 jurisdictions, including 110 firms in China and Hong Kong.  The PCAOB adopted a new policy in October which made the inability to inspect auditors in nations such as China a factor when considering whether to approve them as PCAOB member firms. The PCAOB is currently blocked from inspecting firms based in China. The PCAOB last month rejected an application by Hong Kong-based Zhonglei CPA Co. to become a registered with the PCAOB, citing an inability to inspect its work for companies based in China. It was the first time the board had rejected an application since tightening rules in October.

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