Over on TheCorporateCounsel.net, John Jenkins wrote about the recently announced agreement between China and the US Public Company Accounting Oversight Board (PCAOB). This agreement allows the PCAOB to review financial audits of between 80 – 200 US-listed Chinese companies in conformance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. John said:
The PCAOB announced that the deal, which is embodied in a ‘Statement of Protocol,’ is just a first step, and … comments of PCAOB Chair Erica Williams suggest a healthy degree of skepticism about whether China’s regulators will honor the accord in practice…
This Client Alert from WilmerHale offers a similar cynical view of the ultimate success of the Agreement, setting forth three reasons the law firm believes the landscape hasn’t changed:
- The Statement of Protocol Is Simply a First Step
- The Statement of Protocol Will Have Limited Application, as Chinese Issuers Have Already Been Leaving US Markets
- Congress Continues to Take a Hard Line on China
Even so, in news from Reuters just this morning:
U.S. regulators have selected e-commerce majors Alibaba Group Holding Ltd (9988.HK) and JD.com Inc (9618.HK) among other U.S.-listed Chinese companies for audit inspection starting next month, people with knowledge of the matter said…
The tech duo along with Yum China Holdings Inc (9987.HK) – owner of KFC, Taco Bell and Pizza Hut restaurants in China – have been notified that they are among the first batch of Chinese companies whose audits will be inspected in Hong Kong by U.S. audit watchdog, the Public Company Accounting Oversight Board (PCAOB), the people told Reuters, declining to be identified due to confidentiality constraints.
The respective accounting firms of Alibaba, JD.com and Yum China – PwC, Deloitte and KPMG – have also been notified of the inspection, the people added.
What This Means
This action doesn’t directly relate to or impact ESG disclosures made by Chinese companies (Dan Goelzer recently clarified the current relationship between PCAOB’s scope and ESG disclosures). However, the results of PCAOB reviews – when and if they occur – may find systemic concerns or even flaws in audit procedures and results that may shed some light on ESG data/disclosure verification by those audit firms. Some light is more than we have now.
If PCAOB reviews do take place and financial audit process concerns are identified, that should be viewed as a red flag for ESG by investors and business customers of those companies. Corporate responsible sourcing due diligence processes may need to be modified to – at a minimum – assess whether similar audit/disclosure flaws are present in the information presented to and relied on by corporate customers.