Over the past several years, the exposure of U.S. investors and our capital markets to companies with significant operations in emerging markets, including China, has increased. This increased exposure carries with it a number of significant risks and challenges, many of which we described in our statement of December 7, 2018 and our more recent joint statement along with other SEC staff, Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited, on April 21, 2020.
Among other relevant issues related to emerging market investments, we noted that the Public Company Accounting Oversight Board (PCAOB) continues to be prevented from inspecting the audit work and practices of PCAOB-registered audit firms in China on a comparable basis to other non-U.S. jurisdictions. This limitation on inspections also includes PCAOB access to audit work and practices of Hong Kong-based audit firms, to the extent their audit clients have operations in mainland China.
High quality, reliable financial statements are the bedrock of our disclosure-based regulatory ecosystem, and audit quality is an important driver of high quality financial disclosure. PCAOB inspections are a key component of our regulatory efforts to enhance the quality of financial reporting and ensure audit quality. Ensuring that investors and other market participants have access to high quality, reliable disclosure, including audited financial statements, is at the core of the SEC’s mission. The SEC and the PCAOB are committed to promoting high quality financial reporting and auditing, including through meaningful, principled oversight and enforcement.
Over the last few years as part of our broader efforts to protect U.S. investors and promote high quality financial reporting in emerging markets, including China, we have taken a number of steps including, but not limited to, the following:
- Chairman Clayton has directed the SEC staff to prepare proposals for the Commission to consider in response to the recommendations set forth in the Report on Protecting United States Investors from Significant Risks from Chinese Companies. The report was issued by the President’s Working Group on Financial Markets (“PWG”).
- The report includes recommendations that are designed to strengthen investor protections and improve the integrity of our capital markets by (1) leveling the playing field for all companies listed on U.S. exchanges; and (2) improving disclosure regarding the risks inherent in investing in emerging markets, including China.
- The SEC staff issued a statement on November 23, 2020 providing its views on disclosure considerations for companies based in or with the majority of their operations in the People’s Republic of China.
- The SEC staff hosted an Emerging Markets Roundtable in July 2020 to hear the views of investors, other market participants, regulators and industry experts on the risks of investing in emerging markets, including China, and to explore ways to raise investor awareness of these risks and potential additional steps to mitigate them.
- We issued statements on December 7, 2018 and April 21, 2020 that described for investors and other stakeholders a number of significant issues, including the PCAOB’s inability to inspect the audit work and practices of PCAOB-registered audit firms in China.
- We held meetings in November 2019 and February 2020 with senior representatives of the four largest U.S. audit firms and in March 2020 with two additional U.S. audit firms to discuss each firm’s efforts to advance audit quality in emerging markets, including China. These different meetings are described in our press release in November 2019, our joint statement in February 2020, and a statement in April 2020.
Summary of November 2020 Discussions with Firms
Our prior discussions with global network auditing firms on audit quality in emerging markets have emphasized the need for effective and consistent global oversight of member firms. In prior meetings with these audit firms, we made it clear that, with the PCAOB restricted in its inspection efforts in China, we expected U.S. audit firms to bring appropriate increased attention and resources to their internal and cross-network quality control processes. Those meetings addressed a variety of global audit quality issues, including acceptance and retention policies, independent internal and cross-network review processes, training and benchmarking.
Last week, we held additional meetings with the four largest U.S. audit firms on these important matters. In those meetings, we discussed the measures taken by the firms since our prior meetings to promote audit quality in emerging markets, including China. These discussions focused on (1) factors considered by each firm in making client acceptance and client continuance decisions; (2) the results of completed and ongoing internal inspections; (3) training provided by each U.S. audit firm to local firm engagement teams in emerging markets; and (4) other observations on audit quality as calendar year-end companies approach their annual financial reporting season.
We also discussed the efforts of the audit firms to protect and promote audit quality in light of the operational and other challenges presented by COVID-19. The firms generally reported that they and their audit clients had adjusted well to working remotely. Given the expectation that working would be largely remote through the end of the calendar year, they described how they were operating to address, for example, existence and valuation (e.g., inventory) and ensuring audit quality more generally.
We will continue to promote audit quality in emerging markets, including China, through all of the actions described above, including ongoing discussions with global network auditing firms. These efforts seek to protect investors and other market participants who depend on access to high quality, reliable audited financial statements.
 See SEC Division of Economic and Risk Analysis, U.S. Investors’ Exposure to Domestic Chinese Issuers (Jul. 6, 2020), available at https://www.sec.gov/files/US-Investors-Exposure-to-Domestic-Chinese-Issuers_2020.07.06.pdf.
 See SEC Chairman Jay Clayton, Former SEC Chief Accountant Wes Bricker, and PCAOB Chairman William D. Duhnke III, Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally—Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China (Dec. 7, 2018), available at https://www.sec.gov/news/public-statement/statement-vital-role-audit-quality-and-regulatory-access-audit-and-other.
 See SEC Chairman Jay Clayton, PCAOB Chairman William D. Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of Corporation Finance Director William Hinman and SEC Division of Investment Management Director Dalia Blass, Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited (Apr. 21, 2020), available at https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting.
 See President’s Working Group on Financial Markets, Report on Protecting United States Investors from Significant Risks from Chinese Companies (Jul. 24, 2020), available at https://home.treasury.gov/system/files/136/PWG-Report-on-Protecting-United-States-Investors-from-Significant-Risks-from-Chinese-Companies.pdf; see also SEC Chairman Jay Clayton, SEC Division of Corporation Finance Director William Hinman, SEC Division of Investment Management Director Dalia Blass, SEC Division of Trading and Markets Director Brett Redfearn, SEC Office of International Affairs Director Raquel Fox, SEC Chief Accountant Sagar Teotia, Statement on SEC Response to the Report of the President’s Working Group on Financial Markets (Aug. 10, 2020), available at https://www.sec.gov/news/public-statement/statement-presidents-working-group-financial-markets.
 See SEC Division of Corporation Finance, Disclosure Guidance: Topic No. 10: Disclosure Considerations for China-Based Issuers (Nov. 23, 2020), available at https://www.sec.gov/corpfin/disclosure-considerations-china-based-issuers.
 See SEC’s “Emerging Markets Roundtable” webpage, available at https://www.sec.gov/page/emerging-markets-roundtable.
 Refer to footnotes 2 and 3.
 See Press Release, SEC Chairman Clayton, PCAOB Chairman Duhnke, and Members of SEC Staff Meet With Auditing Firm Representatives to Discuss Audit Quality in Emerging Economies and Markets (Nov. 4, 2019), available at https://www.sec.gov/news/press-release/2019-228.
 See SEC Chairman Jay Clayton, SEC Division of Corporation Finance Director William Hinman, SEC Chief Accountant Sagar Teotia, and PCAOB Chairman William D. Duhnke III, Statement on Continued Dialogue with Audit Firm Representatives on Audit Quality in China and Other Emerging Markets; Coronavirus — Reporting Considerations and Potential Relief (Feb. 19, 2020), available at https://www.sec.gov/news/public-statement/statement-audit-quality-china-2020-02-19.
 See SEC Chief Accountant Sagar Teotia, Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19 (Apr. 3, 2020), available at https://www.sec.gov/news/public-statement/statement-teotia-financial-reporting-covid-19-2020-04-03.
This statement was issued on November 24, 2020, by Jay Clayton, chairman of the U.S. Securities and Exchange Commission; Sagar Teotia, chief accountant of the SEC; and William D. Duhnke III, chairman of the Public Company Accounting Oversight Board.