Law.com Quotes Claudius Modesti on China Foreign Audits Compromise

For its article “Will China’s Compromise on Foreign Audits Be Enough to Stop Stock Market Expulsions?,” Law.com quoted Akin Gump litigation partner Claudius Modesti.

The article discusses the threat faced by almost 100 Chinese companies of being delisted from U.S. stock exchanges by the Securities and Exchange Commission (SEC) in what Law.com refers to as a long-running auditing standoff between the U.S. and China.

The article notes that China’s national secrecy laws prohibit its foreign-listed companies from sharing full financial and working documents with foreign authorities and auditors.

Modesti, a former SEC enforcement attorney and federal prosecutor and the first director of the enforcement division of the Public Company Accounting Oversight Board (PCAOB), said, “The China Securities Regulatory Commission (CSRC) has indicated they’re going to take a more practical approach to the application of state secrecy laws, but what’s that going to look like from the perspective of the PCAOB?”

He added that, from the PCAOB side, the agency will have to determine whether, after redactions, the work papers submitted to it contain information to support an audit, something that the PCAOB can’t determine until the inspection process plays itself out.

Modesti said, “A lot of people are focused on what the Chinese government is proposing, but that’s just a very preliminary step to the most important step, which is, what will the PCAOB be able to review, assuming it can inspect the work papers for the audits of some of these listed companies. Both sides have been through a process of back and forth discussions on how to potentially do this, but they’ve never successfully gone through an inspection. That’s when the rubber is going to hit the road.”