On May 7 the China Securities Regulatory Commission (“CSRC”), China’s Ministry of Finance (“MOF”) and the U.S. Public Company Accounting Oversight Board (“PCAOB”) executed a Memorandum of Understanding on Enforcement Cooperation1 (the “MOU”).
According to a short announcement published on the websites of the CSRC and MOF on May 24, (i) the MOU serves as a framework pursuant to which China and the United States will provide to and exchange with each other audit documents held within their respective countries, and (ii) the CSRC, MOF and PCAOB will continue to negotiate and explore mutually acceptable procedures through which day-to-day supervision will be permitted in respect of PRC accounting firms providing audit services to U.S.-listed companies.
According to the MOU, subject to certain limitations and conditions, each of the CSRC and the MOF (on the one hand) and the PCAOB (on the other hand) (each, an “MOU Party”) will cooperate to provide the requesting MOU Party (i) information and documents held in the files of the requested MOU Party regarding the matters set forth in the request for assistance and (ii) other information and documents regarding the matters set forth in the request for assistance, including (a) documents sufficient to identify all audit review and other services performed by and quality control systems of audit firms, such as their engagement letters and quality control policies, and (b) audit work papers and other documents held by audit firms relating to audit work that is subject to the regulatory jurisdiction of the requesting MOU Party. Assistance and cooperation provided by either Party under the MOU is subject to the relevant domestic laws of such Party. This means that the CSRC and the MOF will need to comply with the PRC Laws on Protecting State Secrets, the PRC Archives Law, etc.
Although the MOU permits an MOU Party to share information obtained from the other MOU Party with other law enforcement and regulatory authorities within its jurisdiction, the MOU does not freely extend the assistance and cooperation mechanism to such other regulators. The MOU includes confidentiality provisions, one of which expressly requires that an MOU Party receiving non-public information from the other MOU Party must seek the providing MOU Party’s prior written consent if it intends to transfer such information to other authorities within its jurisdiction, except, however, that the PCAOB may share such information with the U.S. SEC without prior written consent so long as the PCAOB notifies the CSRC and MOF in advance.
The MOU primarily focuses on the provision and exchange of information for the purpose of law enforcement and compliance. It does not address the other contentious cross border regulatory issues related to audit oversight — namely, on-site audit supervision and on-site investigation.
While the U.S. regulators have not announced how they will proceed in pending registration, inspection or enforcement matters in light of the new MOU, it is likely that how they will proceed will depend in substantial part on how the MOU is applied in practice and whether both sides can make real progress toward a more comprehensive cooperative oversight agreement.
The execution of the MOU is an encouraging indication that the CSRC, MOF and PCAOB may be on their way towards resolving the remaining practical issues.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Beglin-Brian
1Link to the English version of the MOU: http://pcaobus.org/International/Documents/MOU_China.pdf
The Chinese version of the MOU is not yet publically available.
2Sarbanes-Oxley Act § 102(a), § 104 (a) & (b), 15 U.S.C. 7212, 7214 (2002); Bylaws and Rules of the PCAOB, Section 2, Rule 2100, as of August 25, 2011.
6See note 5
11http://stock.jrj.com.cn/2012/07/04075013677800.shtml (Chinese source)
This article was originally published by Bingham McCutchen LLP.