Legal Risks Arising from the U.S. PCAOB’s Inspection on Foreign Accounting Firms: The Chinese Perspective
2011/2/21 10:57:55 点击率[3979] 评论[0]
【法宝引证码】
    【学科类别】经济法
    【出处】Butterworths Journal of International Banking and Financial Law, 2009, Feburary, pp. 96-98
    【写作时间】2011年
    【全文】

    Key Points:
    · Chinese companies listed on U.S stock exchanges and Chinese accounting firms should strengthen their confidentiality and archives management, in particular, they should lawfully identify and protect information on state secrets and other archives;
    · They should ask the Chinese archives authorities to provide more legal certainty.
    · They should also consider negotiating the confidentiality clause of their auditing services agreement in a more reliable manner.

       Introduction
     
       Following the Enron debacle, the Public Company Accounting Oversight Board (PCAOB) was established pursuant to the Sarbanes-Oxley Act of 2002 (Act) in order to oversee the audit of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further, the public interest, in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors.It is mandated by that Act that all accounting firms, either domestic or foreign, that prepare or issue, or participate in the preparation of audit reports for companies listed on U.S. stock exchanges must be registered with the PCAOB, and the PCAOB should have the authority to conduct a continuing programme of inspections to assess the degree of compliance by the accounting firms with the Act, the rules of the PCAOB, the rules of the Securities and Exchange Commission (SEC) or professional standards, and punish any violations.
     
       For that purpose, the PCAOB is required to inspect and review selected audit and review engagements of the firm; evaluate the sufficiency of the quality control system of the firm, and the manner of the documentation and communication of that system by the firm; perform such other testing of the audit, supervisory, and quality control procedures of the firm as are necessary or appropriate.In practice, such inspections largely involve inspecting the auditing working papers of the firm.
     
       By the end of June 2008, 39 accounting firms incorporated in Mainland China and 46 in Hong Kong had been registered with the PCAOB. In particular, the member offices in the PRC Mainland and Hong Kong of the “big four” international accounting firms, i.e. PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte provide auditing services for 11 Chinese H-share companiesand 4 overseas Chinese-funded holding companieslisted in the U.S. (hereinafter“Chinese companies listed in the U.S.”)。
     
       Based on the pertinent provisions in the prevailing laws and regulations of the PRC, if the PCAOB makes a request to inspect the auditing working papers of the above domestic accounting firms, Chinese companies listed in the U.S. and appropriate accounting firms might be faced with substantial legal risks.
     
       I. Risk of violating China’s Law on Guarding State Secrets
     
       In the PRC, guarding state secrets is a statutory obligation for citizens, legal persons and other organisations. Article 21 of the Law on Guarding State Secrets of the PRC (hereinafter the “Law on Guarding State Secrets”)stipulates, “When state secrets have to be furnished for the benefit of contacts and cooperation with foreign countries, approval must be obtained beforehand in line with the prescribed procedures.” Article 22 of the Measures for Implementation of the Law on Guarding State Secretsstipulates, “In foreign contact and cooperation, when the other party requests state secrets for a justifiable reason and through a justifiable channel, such request shall be submitted to the competent authority for approval as stipulated on an equal and mutual benefit basis, and the other party shall be required in a certain form to assume the non-disclosure obligation.”
     
       For the purpose of the above statutory obligation of guarding state secrets, a Chinese company listed in the U.S. should consider the following two issues. First, does the information provided by the company to the external auditor involve any state secret? All Chinese companies listed in the U.S. are state-owned holding enterprises, specialising mainly in energy, traffic, communication, petrochemical and metallurgical industries, and some are even industry leaders. It is based on this special position that the accounting information of such listed companies involves considerable industry-sensitive information. For example, a listed company in the energy industry possesses information on oil reserves, oil and gas pipeline distribution, oil storage and refining and chemical bases; one in the communication industry possesses communication guarantee information of secretive institutions and important departments, and information on interconnection and inter-network settlement between telecom operators. No definite criteria have been established as to which of such sensitive information is classified as commercial secret and which is classified as state secret.
     
       On the other hand, if it is determined or identified pursuant to law that certain accounting information involves any state secret and has to be provided to an accounting firm for the purpose of performing the auditing agreement, has the appropriate Chinese company listed in the U.S. filed an application with the state secret-guarding authorities for approval? In principle, any information that involves state secrets should not be disclosed to the outside. However, if the non-disclosure of such information would limit the scope of the auditing services, it can be disclosed but only with the approval of the state secret-guarding authorities.
     
       If a Chinese company listed in the U.S. unlawfully discloses accounting information to an appropriate accounting firm, it would be faced with the risk of being given administrative sanctions by the state secret-guarding authorities or even being held criminally liable.
     
       II. Risk of violating the Archives Law
     
       In the PRC, guarding archives is also a statutory obligation for citizens, legal persons and other organisations. Article 16 of the Archives Law of the PRCstipulates, “Collectively-owned or individually-owned archives whose preservation is of value to the state and society or which should be kept confidential shall be properly taken care of by the owners. …It shall be strictly forbidden to sell such archives for profit, or to sell them or give them to foreigners.” Article 18 stipulates, “State-owned archives and the archives specified in Article 16 of this Law as well as duplicates of such archives shall not be carried or transported out of the country without authorization.”
     
       For the purpose of the above statutory obligation of guarding archives, an appropriate accounting firm should consider the following two aspects. First, the accounting information provided by a Chinese company listed in the U.S. is the main basis for the auditing arrangement and thus an important source of auditing working papers. If the above accounting information involves state secrets, are the auditing working papers resulting from such information owned by the state? If such auditing working papers are not owned by the state, are they archives “whose preservation is of value to the state and society”? The applicable laws and regulations have not provided specifically for this yet.
     
       If the answer to the first question is confirmative, the appropriate accounting firm should be obligated to guard state secrets, and should not provide the appropriate working papers to any other organisation or individual, including the PCAOB. Even in the accounting firm itself, all control measures should be taken to limit strictly the scope of access. If the answer to the second question is also confirmative, the appropriate working papers must be kept in the PRC and may not be taken out of the PRC without the prior approval of the competent authorities.
     
       On the other hand, will the business cooperation pattern between domestic and overseas accounting firms lead to an illegal exit of archives? It is learned that an overseas, say Hong Kong based?, accounting firm with a Chinese office that provides auditing services for Chinese companies listed in the U.S. would often ask its PRC Mainland office to conduct most of the basic auditing procedures.After the latter finishes the basic auditing work, it would transmit the conclusive auditing working papers to the Hong Kong accounting firm in an electronic form via the Internet for the latter to finish the subsequent procedures on this basis. It can be seen that at least part of the auditing working papers created by the domestic accounting firm are provided to an overseas accounting firm by IT means, and these working papers are in fact already “going abroad”。 For archives “owned by the state” or “whose preservation is of value to the state and society” involving state secrets, does this business cooperation pattern breach the applicable provisions of the Archives Law?
     
       The applicable laws and regulations do not provide specifically for this. If the answer is “Yes”, the domestic accounting firm might be faced with the risk of being punished by the archives authorities.
     
       III.  Risk of certain provisions of the auditing services agreement not being accepted by the China Securities Regulatory Commission (CSRC)
     
       To specify the rights and obligations of both parties, a Chinese company listed in the U.S. enters into an auditing services agreement with the domestic and overseas accounting firms that provide auditing services to it. An auditing services agreement usually contains a confidentiality clause, specifying that the accounting firm is obligated to keep the information provided by the client confidential and should not provide auditing working papers and other information to any third party.
     
       However, the above non-disclosure obligation is not absolute. Some agreements specify that the provision of appropriate information by an accounting firm to the regulatory authorities is not in breach of the non-disclosure obligation. In particular, some Chinese companies listed in the U.S. also accept that the PCAOB should have the authority to require accounting firms to provide auditing working papers and other appropriate information by specifying this in the auditing services agreement or otherwise entering into a supplementary agreement.
     
       Theoretically, the authority of inspection of the PCAOB is a state administrative power in nature and is generally binding on registered accounting firms, while the auditing services agreement is just a contract between private parties and is binding on the contracting parties only. Based on the general principle that “private rights cannot antagonize state powers”, whether or not the contractual auditing services agreement specifies that an accounting firm may provide auditing working papers and other appropriate information to the PCAOB and other overseas regulatory authorities, neither the statutory power of the PCAOB nor the statutory obligation of the accounting firm will be affected in any way.
     
       Therefore, to provide for contractual exceptions to the non-disclosure obligation of an accounting firm in the auditing services agreement is not only unnecessary, but might also make the CSRC worry that the Chinese accounting firm would no longer abide by the applicable laws and regulations of the PRC, and be no longer subject to the supervision of the competent authorities of the PRC. As such, the competent authority might further raise an objection to this, and might also suggest Chinese companies listed in the U.S. and appropriate accounting firms amend their auditing services agreement accordingly.
     
       IV.  Possible solutions
     
       In light of the above legal risks, the author suggests that Chinese companies listed in the U.S. and appropriate accounting firms should consider taking the following measures:
     
       1. Chinese companies listed in the U.S. and appropriate accounting firms should strengthen confidentiality and archives management. In order to perform the Chinese statutory obligation of guarding state secrets and archives, Chinese companies listed in the U.S. and appropriate accounting firms should establish or improve the appropriate internal rules, providing specifically for the scope of confidentiality of documents and information, the responsibilities of the confidentiality staff, confidentiality control measures, and the collection, preservation and utilisation of archives, etc., and carrying out all control measures, so as to establish a long-acting compliance mechanism pursuant to the Law on Guarding State Secrets, the Archives Law and other applicable laws and regulations, based on its practical business operations.
     
       2. Chinese companies listed in the U.S. should identify accounting information involving sensitive information, and take different approaches to different types of accounting information. Based on the principle “who generates, who classifies”, Chinese companies listed in the U.S. should determine pursuant to law if any accounting information generated in routine operations involves state secrets, and the corresponding level and scope of confidentiality.
     
       If it is difficult to determine if certain sensitive information is state secret, a Chinese company listed in the U.S. should submit such information in a timely fashion to the state secret-guarding authorities for identification. A Chinese company listed in the U.S. should not provide any accounting information determined or identified to involve state secrets pursuant to law to an appropriate accounting firm; if the non-disclosure of the above accounting information might limit the scope of auditing, the Chinese company listed in the U.S. should not provide such information to the appropriate accounting firm without the prior approval of the state secret-guarding authorities, provided it takes non-disclosure measures and asks the other party to assume the non-disclosure commitments;
     
       If the appropriate accounting firm discovers in providing auditing services that the accounting information provided by the Chinese company listed in the U.S. might involve state secrets but is not approved yet, it should also remind the company listed in the U.S. of the appropriate legal risks in a timely manner.
     
       3. Appropriate accounting firms should ask the state archives authorities to interpret the applicable provisions of the Archives Law in a suitable manner to define which auditing working papers are owned by the state and which are archives “whose preservation is of value to the state and society”, and if the business cooperation pattern between domestic and overseas accounting firms involves the exit of archives. Once these questions have been clarified, there will be clear legal guidance for Chinese companies listed in the U.S. and appropriate accounting firms to procure the legal obligation of guarding archives.
     
       4. Chinese companies listed in the U.S. and appropriate accounting firms should amend the confidentiality clause of the auditing services agreement. Considering there are certain legal risks in providing for exceptions to the non-disclosure obligation in the auditing services agreement itself, Chinese companies listed in the U.S. and appropriate accounting firms should communicate actively to eliminate the concerns of the CSRC.
     
       On one hand, the auditing services agreement may specify that “accounting firms shall abide by the law of the PRC and obtain the lawful approval of the competent authorities of the PRC in providing auditing working papers or other information to the outside” in order to show the respect to the laws and regulations of the PRC; on the other hand, this  may be inappropriate if the PCAOB and other overseas regulatory authorities have the authority to require registered accounting firms to provide auditing working papers and other appropriate information, etc., which will neither affect the rights and obligations of the parties nor incur any legal risk.
     
       If necessary, Chinese companies listed in the U.S. and appropriate accounting firms may also make retroactive adjustments to the auditing services agreements of the previous reporting periods and enter into an appropriate supplementary agreement in line with the above.

    【作者简介】
    刘轶,南开大学经济学院副研究员,硕士生导师,主要研究国际金融法。
    【注释】
    * The present paper forms part of a research project conducted under the joint auspices and financial support of the China Postdoctoral Research Foundation and Wuhan University Institute of International Law, for which the author is sincerely grateful.
    Dr. Liu Yi has an LLD in international law (Wuhan University), is a Postdoctoral Research Fellow at the Nankai University School of Economics.
    [①] However, according to Sec. 101 of the Sarbanes-Oxley Act of 2002(15 USC 7211), the PCAOB is not an agency or establishment of the United States Government, and should be subject to, and have all the powers conferred upon a nonprofit corporation by, the District of Columbia Nonprofit Corporation Act.
    [②] See Sec. 104(a) of the Sarbanes-Oxley Act of 2002(15 USC 7214).
    [③] The frequency of regular inspection by the PCAOB will be annual for each registered public accounting firm that regularly provides audit reports for more than 100 issuers; at most, once every three years for each registered public accounting firm that regularly provides audit reports for 100 or fewer issuers. The PCAOB may adjust its frequency of inspection as the case may be or implement temporary inspections. See Sec. 104(b) and (d) of the Sarbanes-Oxley Act of 2002(15 USC 7214).
    [④] H-share companies means a joint-stock limited company incorporated in the PRC Mainland pursuant to the Company Law of the PRC, having issued foreign capital shares listed overseas (H shares) and listed on a regulated overseas stock exchange. By the end of June 2008, there were 151 H-share companies in total.
    [⑤] Overseas Chinese-funded holding companies means a state-owned company incorporated outside the PRC Mainland and listed on a regulated overseas stock exchange.
    [⑥] Adopted at the Third Session of the Seventh National People's Congress, promulgated by Order No. 7 of the President of the PRC on September 5, 1988, and effective as of May 1, 1989.
    [⑦] Endorsed by the State Council of the PRC on April 25, 1990, promulgated by Order No. 1 of the National Administration for Protection of State Secrets(NAPSS) on May 25, 1990, and effective as of the date of promulgation. Under current government structure of the PRC, the NAPSS is an organisation directly under the State Council, acting concurrently the Office of the Central Committee of the Communist Party of China.
    [⑧] Adopted at the Twenty-second Session of the Sixth National People's Congress, promulgated by Order No. 58 of the President of the PRC on September 5, 1987, effective as of January 1, 1988, and subsequently amended by the Decision of the Standing Committee of the National People’s Congress on Amending the Archives Law of the PRC on July 5, 1996.

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