Why Big Four audits were blocked historically

In this episode of Law, disrupted, John is joined by Sarah Heaton Concannon, Partner in Quinn Emanuel’s Washington D.C office and Co-Chair of Quinn Emanuel’s SEC Enforcement Defense practice, and Xiao Liu, Co-Managing Partner in Quinn Emanuel’s Shanghai office and Chair of Quinn Emanuel’s China Practice. 

Currently, 200 Chinese companies are publicly listed in the U.S. Those firms face the prospect of being delisted under the Holding Foreign Companies Accountable Act due to a disagreement between American and Chinese authorities on the ability to conduct investigations and access audit work papers in China. John, Xiao and Sarah discuss the terms of the China-United States agreement whereby Chinese accounting firms can share certain information with American regulators about the finances of Chinese listed companies. Is it a done deal?

John opens the conversation by asking Sarah what exactly has been agreed to by U.S. and Chinese officials. She talks about how the agreement gives them the ability to conduct on-site inspections in Hong Kong and touches on how Chinese privacy and security statutes have made it impossible for the SEC and the PCAOB to conduct their routine examinations of auditors. Sarah notes how this new agreement enables the PCAOB to have its inspectors on the ground as early as mid-September, seemingly giving the auditors free reign over which audits to inspect and unfettered access to audit work papers.

John then asks Xiao why this deal and special rules are needed and queries whether it could be construed as an example of the U.S. picking on China. Xiao talks about how the history of the relationship between the two nations is an important factor to consider in understanding the relationship between the PCAOB, USA and China. He dives into how, on the one hand, there is Chinese law supposedly prohibiting these audit firms from scrutinizing these materials, and on the other hand, U.S. law, which states these audit firms do have the obligation to turn over papers. Xiao highlights how Chinese authorities have a strong interest in enforcing state secrets laws and personal privacy protection laws. However, at the same time, they care about public statements regarding agreements with U.S. authorities, especially those impacting the Chinese state-owned companies whose shares are listed in the U.S.

Together, John, Sarah and Xiao dive deeper into how Chinese issuers have typically tapped the Hong Kong-based affiliates of the Big Four companies, granting the PCAOB access to working papers and the right to take testimony from audit company staff in China. Sarah talks through her predictions on the future timeline of events, noting that she expects the PCAOB to draft a shortlist of companies that were already front of mind in the enforcement space and that they will quickly try to move through those audit records.  

The conversation shifts to a more financial perspective of the issue with John asking Xiao whether these Chinese companies will continue to want the ability to be listed in the U.S. Xiao explains how China is now comfortable with allowing PCAOB access to Chinese companies’ audit papers as China has strengthened its own state secrets laws, personal privacy laws, and cybersecurity laws. China has taken the necessary steps to protect itself from issues that they have encountered in the past with the U.S. before reaching the agreement. 

Finally, John asks what's next and what the future holds. Sarah believes that there will be some caution to see if the PCAOB is satisfied, but only time will tell how this agreement will play out. 

Podcast Link: Law-disrupted.fm
Host: John B. Quinn
Producer: Alexis Hyde
Music and Editing by: Alexander Rossi