The Public Company Accounting Oversight Board (PCAOB) recently announced that it reached an enforcement cooperation agreement with the China Securities Regulatory Commission and the Ministry of Finance. The agreement, set forth in a Memorandum of Understanding (MOU) between the parties (available here, PDF), creates a mechanism to share documents and information relevant to investigations in the parties’ respective jurisdictions. This enhanced cooperation is intended to promote public trust and investor confidence in the capital markets by improving the accuracy and reliability of audit reports. (See MOU, Art. I.)
Scope of Assistance: Under the MOU, the parties agree to provide each other with “the fullest assistance permissible” to secure regulatory compliance, including by providing information or documents regarding the matter set forth in the request for assistance, such as documents detailing the nature and scope of audit reviews or other professional services, audit work papers, and documents identifying firms’ quality control systems. (See MOU, Art. IV(b).)
The Process for Requesting Assistance: Requests for assistance must be in writing and must specify various items, including: the information requested; a description of the conduct at issue; the purpose for which the information is sought and details regarding the jurisdiction’s implicated law or regulation; the link between that regulation and the requesting party’s function; identification of where the information may be found; and the time for a response. (See MOU, Art. V.) Requests may be denied on an “exceptional basis” such as where the request would require the requested party to violate domestic law; the request does not follow the MOU’s provisions; on grounds of public or essential national interest; or where the information is not specific enough to permit the requested party to comply. (See MOU, Art. III(b).)
Permissible Uses of Shared Information: the party obtaining information under the MOU can only use it for purposes set forth in the request for assistance, and for “the purpose of conducting administrative enforcement proceedings, conducting any investigation for any charge pertaining to the laws or regulations cited in the request for assistance, or for any other purpose permitted or required by the requesting party’s authorizing statute, regulations or rules.” (MOU, Art. VII.) Notably, the imposition of sanctions on audit firms within either party’s jurisdiction is contemplated. (See id.)
Confidentiality of Shared Information: The MOU generally requires parties receiving non-public information to keep that information confidential except for certain enumerated exceptions or in response to a “legally enforceable demand.” (MOU, Art. VIII.) The parties may share information with certain law enforcement or regulatory authorities in their jurisdictions, as set forth in Article IX, who must maintain the information as privileged and confidential. However, before either party can share non-public information with another regulatory authority, it must request prior written consent from the other party. The one exception is that the PCAOB need only notify the Chinese regulators in advance of sharing information with the U.S. Securities and Exchange Commission. (See MOU, Art. IX.)
What’s next? This agreement should help facilitate greater information-sharing between U.S. and Chinese regulators. But it does not yet resolve the important issue of allowing the PCAOB to inspect in China audit firms that are registered with the PCAOB and that audit Chinese companies that trade on U.S. exchanges. Discussions on this are ongoing. We will be sure to monitor these developments.