Who’s Watching The Watchdogs? PCAOB Stands Still As China Floods US Markets With Fraud

The Public Company Accounting Oversight Board (PCAOB) describes itself as a nonprofit corporation “established by Congress to oversee the audits of public companies in order to protect investors and further the public interest.” That is the promise. The reality is something far different and far more troubling.

Today, 286 Chinese companies trade on America’s major exchanges, representing more than a trillion dollars in market value. Investors assume these businesses are held to the same auditing standards as every other company operating in U.S. capital markets. They are not. And the federal body tasked with protecting investors, the PCAOB, has been asleep at the wheel.

Start with the basics.

There are 47 PCAOB-registered audit firms based in China. Over the past three years, the PCAOB has published only seven inspection reports covering Chinese or China-related audit firms. Seven out of forty-seven. And those seven reports paint a picture so bleak it borders on surreal, with deficiency rates ranging from 67% to 100%. Four of the seven firms examined, including partnerships with Chinese affiliates of the Big Four accounting firms like KPMG and PwC, were judged to have a 100% deficiency rate.

Let me put that plainly. The U.S. government’s own auditing watchdog reviewed the work of several Chinese-related audit firms and found every single file it inspected to be materially deficient.

In more than three decades on Wall Street, I have never read inspection reports like these. They read less like regulatory documents and more like gallows humor. Except there is nothing funny about hundreds of billions of American retirement dollars exposed to this level of risk.

Yet what has the PCAOB done with this information? What sweeping reforms has it demanded? What accountability has it imposed? The answer appears to be nothing.

This is all the more astonishing when one considers the extraordinary cost structure of the PCAOB itself. The organization has roughly 900 employees and a budget of $399.7 million for 2025. Its chair earns a whopping $673,000 a year, while the other four board members collect close to $547,000 each. These are the highest compensation levels of any U.S. financial regulatory board and they dwarf the salaries of officials with far greater responsibility.

To put this in perspective:
• The President of the United States earns $400,000.
• The four-star admiral overseeing the entire Indo-Pacific Command, responsible for countering China militarily, earns roughly $220,000.

We are paying PCAOB board members nearly triple the salary of the commander charged with defending America’s interests in the Pacific. And for what? For an oversight record that shows China enjoying an audit environment unlike any other jurisdiction in the world. One where the rules are “mandatory,” except when they are not, where transparency is expected except when politically inconvenient, and where deficiencies are documented but consequences are nonexistent.

Congress recognized the danger of this arrangement when it passed the Holding Foreign Companies Accountable Act (HFCAA) in 2020. The law was designed to ensure that foreign companies, especially Chinese companies, could not raise capital in U.S. markets while shielding their auditors from U.S. inspection. It was a bipartisan acknowledgment that China’s long-standing refusal to provide audit access posed an unacceptable risk to American investors.

In 2022, Washington and Beijing reached a hollow, temporary accommodation that allowed PCAOB inspectors unprecedented access to some audit firms in China. That access delayed waves of delistings that otherwise would have occurred under the HFCAA. But access alone is not the goal. Accountability is. And the results so far, based on the seven inspection reports produced to date, are nothing short of disastrous.

The PCAOB has publicly stated that it will continue evaluating China’s compliance annually. That is cold comfort when the evidence in front of us shows persistent, systemic deficiencies so widespread that no responsible regulator should be content to simply “evaluate.” The question is whether the agency is willing to use the full tools Congress gave it, and whether anyone in Washington will insist that it finally do so.

We should be clear-eyed. China is the only country on Earth that is effectively excused from complying with U.S. audit expectations at scale. No other jurisdiction benefits from this kind of regulatory indulgence. And no serious national-security, economic-security, or investor-protection framework should be forced to tolerate this asymmetric advantage.

So the question becomes this. What will Congress and or the current administration require the PCAOB to do to act in the spirit of the HFCAA? Why do the Big Four U.S. accounting firms continue to lend their names to mainland Chinese auditors when inspection reports show 100% audit failure rates? Will Washington demand that the PCAOB enforce the law with the seriousness this moment requires? Will it insist that American investors receive the transparency they were promised? Or will it allow this institutional open season to continue, even as China prepares for war against the United States?

It is time for the United States to rescind the hollow 2022 agreement and hold China and its companies to account for these glaring and gross deficiencies. Perceived access should not be the litmus test of audit compliance. The disastrous audit results must be addressed.

The PCAOB’s failures are not abstract. They directly expose U.S. investors, including pension funds, retirees, index-fund holders, and endowments, to opaque financial statements reviewed by audit firms that, by the PCAOB’s own measurements, cannot meet even the most basic standards of quality.

If the PCAOB wishes to justify its budget, its mandate, and its extraordinarily high compensation levels, there is only one path. Rigorous enforcement, uncompromising transparency, and the application of the same standards to China that every other country faces. Anything less is a dereliction of duty.

Investors deserve better. Our regulatory system demands better. The integrity of our markets requires it. And U.S. national security demands it.

J. Kyle Bass is the founder and chief investment officer of Rochefort Ventures, a life member of the Council on Foreign Relations, and an adviser to U.S. government and military bodies on China.

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