SEC:Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China
11 Dec, 2018 11:26
source: 香港奇点财经Singularity Financial
External Audits of Multinational Companies Require Global Coordination
A multinational company must comply with financial reporting obligations in many of the countries in which it has operations and activities, and it must prepare consolidated financial statements that include its financial transactions and events worldwide. Critical to a company’s compliance with these financial reporting obligations is the work of the company’s external auditor. Accordingly, an external audit firm must be able to conduct or coordinate the delivery of its audit services on a worldwide basis.
The largest of these audits are conducted or coordinated through global networks and other affiliations of individual firms. The individual firms are subject to jurisdiction-based ownership, licensing, registration, and other regulatory requirements, even as they draw on, for example, globally common technologies, tools, methodologies, training, and quality assurance monitoring.
The auditor’s report for a company’s consolidated financial statements is typically signed by only one firm in the audit firm’s global network. For U.S.-listed companies, publicly available disclosure forms filed with the PCAOB enable investors and others to identify whether other firms, including firms affiliated through a global network, participated in the audit and, when certain thresholds are met, the extent of their participation.
Regulatory Oversight of International Financial Reporting and Auditing Requires Significant Cross-Border Regulatory Cooperation
The reality of today’s global business and audit environment drives regulatory cooperation, in much the same way as it has driven jurisdiction-based audit firms to form networks and other affiliations. In short, for oversight to be effective, regulators around the globe must work together. This makes sense as the world’s securities and audit regulators share a common mission to protect investors and foster market integrity. In the case of multinational companies, fulfilling this all-important function is not possible if the work of the principal regulators—typically the country or countries with the primary listings—is limited by national borders.
The Approach of the Principal U.S. Capital Markets Regulators to International Financial Reporting and Auditing is Multifaceted
The SEC’s three-part mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC advances its mission by, among other responsibilities, administering and enforcing requirements for public companies, funds, and broker-dealers to provide audited financial statements to investors. As the primary regulator of the world’s largest securities markets, administering and enforcing the requirements for reliable financial reporting requires the SEC to be engaged in many topics that extend beyond the U.S. borders.
Indeed, the flow of international capital investment presents challenges, not just for U.S.-listed companies and economic interests, but also for the SEC’s efforts to protect transparency and accountability in financial reporting globally. Protecting transparency and accountability in financial reporting is vital.
The SEC oversees the PCAOB, which, in turn, is the principal U.S. regulator that oversees the audits of public companies and SEC-registered brokers and dealers. The PCAOB is required by U.S. law to conduct regular inspections of all registered public accounting firms, both domestic and foreign, that issue such audit reports or play a substantial role in the preparation of them. These inspections seek to protect investors in the U.S. public capital markets by ensuring that audit firms adhere to, among other things, PCAOB standards.
The PCAOB conducts inspections of PCAOB-registered firms across the globe and has inspected PCAOB-registered firms in 50 different non-U.S. jurisdictions. With respect to foreign-registered public accounting firms, the PCAOB cooperates closely with audit regulators outside the United States, and the scope of that cooperation is extensive.
An example of this cross-border collaboration and cooperation is the PCAOB’s active membership in the International Forum of Independent Audit Regulators (IFIAR), which consists of 53 independent audit regulators from around the world.
Addressing Country-Specific Restrictions on Access to Information and Auditor Inspections is a Complex Task that Requires Extensive Cooperation and Ongoing Attention
An important issue affecting the oversight responsibilities of U.S. capital markets regulators involves foreign privacy and other data protection laws, which significantly impact cross-border information sharing. Various countries’ laws, including blocking statutes and data protection, privacy, confidentiality, bank secrecy, state secrecy, and national security laws, are designed to achieve national objectives. But they also frequently create obstacles to cross-border flows of information between regulators and foreign-domiciled registrants, thus complicating, and in some instances impeding, the ability to carry out regulatory responsibilities.
Another significant challenge is with regard to PCAOB audit inspections and the related regulatory uses of the information. The PCAOB is currently restricted from inspecting audit work and practices of PCAOB-registered firms in China (including Hong Kong, to the extent their audit clients have operations in China). The PCAOB has worked to increase its access to China’s audit work papers, but progress has been slow and satisfactory resolution remains uncertain.
Where the PCAOB is not able to conduct inspections of audits of foreign-based companies listed in the U.S., investors in these companies do not receive the tangible, quality-enhancing benefits that can result from PCAOB inspections.
Efforts with Chinese Regulators to Improve Information Access and Audit Inspections are Ongoing but We Have Not Yet Made Satisfactory Progress
While information barriers certainly continue to exist in multiple jurisdictions, we believe the resolution of these issues discussed above with China is of the most significance to investors. The SEC and the PCAOB have sought constructive dialogues with Chinese officials and regulators over recent years, emphasizing the importance of investor protection and the quality of financial reporting and audit services. Despite these efforts, we have not yet made satisfactory progress.
Our principal goal is to achieve a level of cooperation with the Chinese authorities that both (1) respects Chinese and U.S. sovereignty, and (2) enables the SEC and PCAOB to have timely access to the information necessary to conduct investigations or inspections.
The inability to date to achieve this level of regulatory cooperation with Chinese authorities raises a number of investor protection and general oversight issues.
The U.S. stock markets have long been attractive to foreign companies because of their efficiency and liquidity as well as the potential benefits offered in the form of brand-name enhancement and increased visibility. Many China-based companies, and companies that have significant operations in China, have sought these benefits. The factors driving these benefits include the application of U.S. disclosure requirements as well as regulatory oversight and enforcement.
We believe it also is important to recognize that PCAOB inspections and SEC regulatory activities not only help to improve audit quality for the inspected foreign auditors’ U.S. listed clients, but also provide benefits that may spread to these auditors’ non-U.S.-listed foreign public clients. Said another way, the PCAOB inspection process that focuses on audits of U.S.-listed companies may drive the subject audit firm to improve its work in respect of companies that are not U.S.-listed