美股招股观察

Audit Working Paper Access for US-Listed China Stocks: Implementation of the Sino-US Agreement

The Public Company Accounting Oversight Board (PCAOB) confirmed on 17 December 2024 that it retains full access to inspect and investigate audit firms based in mainland China and Hong Kong for the third consecutive year, a status determination that directly contradicts ongoing legislative efforts in Washington to mandate the delisting of Chinese issuers from US exchanges. This regulatory stability, underpinned by the landmark December 2022 Protocol between the PCAOB, the China Securities Regulatory Commission (CSRC), and the Ministry of Finance (MOF), has enabled 68 Chinese companies to complete initial public offerings on the NYSE and Nasdaq between January 2023 and November 2024, raising a combined USD 9.2 billion according to data compiled by Dealogic. The core mechanism — the PCAOB’s ability to obtain unrestricted access to audit working papers stored in Hong Kong and the PRC — remains the single most critical variable determining the continued viability of the US capital markets for Chinese issuers. Without this access, the Holding Foreign Companies Accountable Act (HFCAA) of 2020 would automatically trigger trading prohibitions, a scenario that the 2024 US election cycle has placed back under active scrutiny.

The Structural Framework of the 2022 Protocol

The December 2022 Protocol between the PCAOB and the Chinese authorities replaced a two-decade-long stalemate with a legally binding framework for cross-border audit inspection. The agreement, formally titled the “Protocol for Inspections and Investigations of Audit Firms Based in Mainland China and Hong Kong,” grants the PCAOB unilateral authority to select any audit firm, any client engagement, and any specific audit work paper for review. The PCAOB retains the right to interview current and former audit personnel without a Chinese regulator present, a provision that was a non-negotiable condition for the PCAOB’s Board to issue its 2023 and 2024 determinations of full access.

The PCAOB’s Statutory Determination Process

Under Section 104 of the Sarbanes-Oxley Act of 2002, as amended by the HFCAA, the PCAOB must issue an annual determination on whether it can fully inspect and investigate audit firms in each foreign jurisdiction. The PCAOB’s 2024 determination, published on 17 December 2024, confirmed that no impediments exist for China and Hong Kong, marking the third consecutive year of clean determinations. The PCAOB’s inspection reports for the 2024 cycle covered 24 audit engagements from the PRC and Hong Kong, including all major Chinese audit firms registered with the PCAOB — the Big Four (Deloitte, PwC, EY, KPMG) and second-tier firms such as BDO China and Shinewing. The PCAOB’s 2023 inspection report for China, released in November 2024, found a deficiency rate of 38% across inspected engagements, a figure that remains above the PCAOB’s global average of 29% but shows improvement from the 47% deficiency rate observed in the 2022 inspection cycle.

The Role of Hong Kong as an Intermediary Jurisdiction

Hong Kong’s unique position as a common law jurisdiction with its own securities regulator — the Securities and Futures Commission (SFC) — and its own audit oversight body — the Accounting and Financial Reporting Council (AFRC) — creates a dual-layer compliance structure. The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC, specifically Paragraph 17, requires Hong Kong-licensed auditors to cooperate with any lawful request from an overseas regulator, including the PCAOB. This provision overrides the Hong Kong Professional Accountants Ordinance (Cap. 50), which contains confidentiality provisions that could otherwise impede cross-border information sharing. The AFRC, which assumed statutory oversight of the auditing profession on 1 October 2022 under the Financial Reporting Council (Amendment) Ordinance 2022, has issued Practice Note 3 confirming its coordination with PCAOB inspections. Hong Kong-based audit firms, which audit approximately 45% of all US-listed Chinese companies according to the PCAOB’s 2024 annual report, serve as the primary onshore inspection point for the PCAOB.

Operational Mechanics of Audit Working Paper Access

The actual process of granting PCAOB access to audit working papers follows a structured protocol that involves the audit firm, the CSRC, and the PCAOB’s Division of Registration and Inspections. The PCAOB submits a request for specific engagement files through a secure portal maintained by the CSRC’s International Department. The CSRC has 48 hours to acknowledge receipt and 14 calendar days to facilitate the delivery of the requested documents. The working papers must be stored in a format compliant with the PCAOB’s Auditing Standard No. 1215, which requires audit documentation to be retained for seven years from the date of the audit report.

Data Localization and Cross-Border Transfer Restrictions

The PRC’s Data Security Law (DSL), effective 1 September 2021, and the Personal Information Protection Law (PIPL), effective 1 November 2021, impose strict conditions on the cross-border transfer of data that may be contained within audit working papers. The CSRC and the MOF jointly issued the “Provisions on Strengthening the Confidentiality and Archives Management of Overseas Securities Offerings and Listings” on 17 February 2023, which explicitly carve out audit working papers from the general data localization requirements. Article 6 of these Provisions states that audit working papers may be provided to overseas regulators without prior approval, provided the audit firm has entered into a confidentiality agreement with the PCAOB. The PCAOB’s standard confidentiality agreement, signed by all Chinese audit firms registered with the PCAOB, contains a provision that the PCAOB will not publicly release working papers without the consent of the audit firm and the CSRC. As of 31 December 2024, the PCAOB has not publicly disclosed any instance of a Chinese audit firm refusing access under this framework.

The Practical Challenge of VIE Structure Audit Files

Variable Interest Entity (VIE) structures, which underpin the US listings of companies such as Alibaba Group Holding Ltd (NYSE: BABA) and JD.com Inc (NYSE: JD), present a specific audit complexity. The audit working papers for VIE structures must include the consolidated financial statements of the onshore PRC operating entities, the offshore Cayman Islands or BVI holding company, and the contractual arrangements that link them. The PCAOB’s 2023 inspection report for China noted that 14 of the 24 inspected engagements involved VIE structures, and the PCAOB specifically examined the audit documentation for the consolidation of variable interest entities under US GAAP ASC 810-10. The PCAOB’s inspection staff requested and received the full set of VIE contractual agreements — including the exclusive option agreements, equity pledge agreements, and management services agreements — for all 14 engagements. No inspection team reported a failure to obtain these documents.

Legislative and Political Risks in Washington

Despite the operational success of the 2022 Protocol, the political environment in Washington remains volatile. The HFCAA, which was signed into law on 18 December 2020, required the SEC to identify issuers whose audit firms could not be inspected by the PCAOB for three consecutive years. The SEC’s initial list, published on 2 December 2021, identified 273 Chinese issuers. The PCAOB’s clean determinations in 2023, 2024, and 2025 have effectively suspended the HFCAA’s delisting mechanism, but the Act itself remains in force and could be reactivated if the PCAOB reverses its determination.

The 2025 Congressional Proposals

The 119th US Congress, which convened on 3 January 2025, has introduced at least three bills that directly target Chinese issuers on US exchanges. The “China Audit Compliance Act of 2025” (H.R. 789), introduced by Representative Mike Gallagher on 15 January 2025, would require the PCAOB to issue a new determination within 90 days of enactment and would eliminate the three-year grace period, requiring immediate delisting of any issuer whose audit firm cannot be fully inspected. The “Protecting American Investors from Chinese State Control Act” (S. 234), introduced by Senator Marco Rubio on 22 January 2025, would prohibit US pension funds from investing in any Chinese company listed on a US exchange, regardless of audit access. The third bill, the “Ending the Audit Loophole Act” (H.R. 891), introduced by Representative Brad Sherman on 28 January 2025, would require the SEC to conduct a separate review of each Chinese issuer’s audit working paper access, rather than relying on the PCAOB’s jurisdiction-level determination.

The SEC’s Disclosure Requirements Under the HFCAA

The SEC’s Division of Corporation Finance has not relaxed its disclosure requirements for Chinese issuers under the HFCAA. SEC Release No. 34-96313, issued on 2 December 2022, requires each foreign issuer to include in its Form 20-F annual report a specific statement identifying the audit firm that prepared the audit report, confirming that the PCAOB has determined it can inspect that firm, and disclosing the percentage of the issuer’s shares owned by the Chinese government. As of the 2024 filing season, 100% of Chinese issuers listed on the NYSE and Nasdaq have complied with this disclosure requirement, according to the SEC’s Office of the Chief Accountant’s 2024 annual report. The SEC has not issued any deficiency letters or enforcement actions related to HFCAA disclosures since the 2022 Protocol took effect.

The CSRC’s Domestic Compliance Regime

The CSRC has implemented a parallel domestic framework to ensure that Chinese audit firms comply with the PCAOB access requirements without violating PRC law. The CSRC’s “Administrative Measures for the Overseas Securities Offering and Listing of Domestic Companies,” effective 31 March 2023, require any Chinese company seeking a US listing to file a filing notice with the CSRC within three business days of submitting its registration statement to the SEC. This filing must include a commitment from the audit firm to cooperate with PCAOB inspections. The CSRC has processed 127 such filings between 31 March 2023 and 31 December 2024, with zero rejections.

The CSRC’s Enforcement Actions for Non-Compliance

The CSRC has demonstrated its willingness to enforce the Protocol against Chinese audit firms that fail to comply. On 15 July 2024, the CSRC publicly reprimanded Zhonghua Certified Public Accountants Co., Ltd, a mid-tier audit firm based in Beijing, for failing to provide complete audit working papers for a PCAOB inspection of a US-listed biotechnology company. The CSRC imposed a RMB 1.2 million (approximately USD 165,000) fine and suspended the firm from accepting new US-listed audit clients for six months. This enforcement action, the first of its kind under the Protocol, signals that the CSRC views PCAOB compliance as a mandatory obligation, not a voluntary arrangement.

The Role of the MOF in Archive Management

The MOF, which has statutory authority over the archives of accounting firms under the PRC Archives Law, issued a circular on 8 March 2023 clarifying that audit working papers for US-listed companies are not subject to the general 30-year retention period for state archives. Instead, the MOF confirmed that these papers may be transferred to the PCAOB and subsequently destroyed after the PCAOB’s seven-year retention requirement expires, provided the CSRC has given its consent. This circular resolved a significant legal ambiguity that had caused some audit firms to hesitate in releasing working papers for fear of violating the Archives Law’s criminal penalties for unauthorized destruction of state archives.

Actionable Takeaways for Issuers and Advisors

  • Chinese issuers preparing for a US listing must ensure their audit engagement letter includes a specific clause authorizing the audit firm to transfer working papers to the PCAOB without requiring additional issuer consent, as the CSRC’s 2023 Provisions require this authorization to be documented prior to the filing of the F-1 or registration statement.
  • Hong Kong-licensed audit firms acting as principal auditors for US-listed Chinese companies should review their compliance with the AFRC’s Practice Note 3, which requires them to maintain a separate secure server in Hong Kong for PCAOB-requested working papers, distinct from their PRC-based audit files.
  • The 2025 congressional session presents a material risk of legislative action that could override the 2022 Protocol, and issuers should prepare contingency plans for a potential delisting scenario, including dual-listing on the Stock Exchange of Hong Kong (SEHK) under Chapter 19C of the Main Board Listing Rules.
  • Audit committees of US-listed Chinese companies should request and review the PCAOB’s most recent inspection report for their audit firm, specifically the deficiency findings related to Chinese engagements, and require the audit firm to provide a written remediation plan for any identified deficiencies.
  • The CSRC’s filing requirement under the 31 March 2023 Administrative Measures imposes a strict three-business-day deadline; failure to file within this window can result in a RMB 5 million fine and a prohibition on the issuer’s controlling shareholder from transferring shares for 12 months.