Introduction
As Chinese companies expand overseas and multinational corporate groups invest in China, the question of whether "foreign certified public accountants and accounting firms can conduct audit services within China" is increasingly being asked.
This issue cannot be judged solely by the qualifications of foreign CPAs or foreign accounting firms. In China, the entities authorized to issue statutory audit reports are limited to registered accountants and accounting firms, while a "temporary practice system" based on regulations from the Ministry of Finance is established for certain cross-border audits conducted by foreign accounting firms.
On the other hand, in Japan, the Certified Public Accountants Act restricts the practice of auditing or certifying financial documents to certified public accountants and audit corporations. In the United States, the state CPA laws and PCAOB system regulate the entities that can provide audit and other attestation services.
This article organizes key points regarding cross-border audit practices, focusing particularly on the temporary practice system for foreign accounting firms in China, while referencing the existing article "Cross-Border Audit Regulations in Japan, China and the United States."
1. Basic Structure of the Audit System in China
The central law governing the audit system in China is the "Certified Public Accountants Law of the People's Republic of China (中华人民共和国注册会计师法)."
This law stipulates the services performed by registered accountants, including the examination of corporate financial statements and the issuance of audit reports, capital verification, audit services related to mergers, divisions, and liquidations of enterprises, and other audit services as prescribed by law.
Furthermore, the work of registered accountants is structured so that the accounting firm they belong to uniformly accepts it and enters into contracts with clients. Therefore, in China, there is no system in which registered accountants independently undertake statutory audit work as individuals; rather, audit work is conducted through accounting firms.
In this regard, Chinese law can be organized to adopt a system that limits the entities that can issue statutory audit reports to registered accountants and accounting firms.
However, Chinese law does not adopt a comprehensive prohibition format like Article 47-2 of Japan's Certified Public Accountants Act, which broadly prohibits "conducting audits or certifications of financial documents as a business." Rather, it is appropriate to understand that it positions registered accountants and accounting firms as the entities that issue statutory audit reports and adopts a structure that recognizes the evidentiary effect of audit reports conducted by registered accountants in accordance with the law.
2. Comparison with the Japanese System
In Japan, Article 2, Paragraph 1 of the Certified Public Accountants Act stipulates "auditing or certifying financial documents" as the work of certified public accountants, and Article 47-2 of the same law generally prohibits individuals who are not certified public accountants or audit corporations from conducting such work as a business.
As a result, Japanese law can be said to be a "business monopoly type" system that does not merely regulate the authority to sign audit reports but limits the audit certification work itself to certified public accountants and audit corporations.
In contrast, Chinese law can be understood as a "limited statutory audit entity type" system that does not impose a comprehensive prohibition on audit certification work in the same manner as Japanese law, but rather limits the entities that can issue statutory audit reports to registered accountants and accounting firms.
However, in practice, in either system, it is not permitted for unqualified individuals or entities not recognized by law to issue legally effective audit reports. In that sense, it can be said that Japan and China ensure the reliability of audit reports while using different legal techniques.
3. Temporary Practice by Foreign Accounting Firms in China
The most important point in China is that there are cases where foreign accounting firms can conduct audit procedures within China.
The "Interim Regulations on the Temporary Execution of Audit Services by Overseas Accounting Firms in Mainland China" (Cai Hui [2011] No. 4) issued by the Ministry of Finance establishes a system for accounting firms established in Hong Kong, Macau, Taiwan, or abroad to temporarily conduct audit services in mainland China.
In this system, "temporary practice" means that foreign accounting firms receive requests from clients outside of China and temporarily conduct audit procedures for companies and other related organizations established in mainland China.
For example, a typical case is when a U.S. parent company requests a U.S. audit firm to conduct a group audit, and as part of that, the audit firm conducts certain audit procedures in mainland China to obtain audit evidence regarding its Chinese subsidiary.
However, this system does not allow foreign accounting firms to freely conduct audit services in the Chinese market. To temporarily practice in mainland China, foreign accounting firms must submit a prescribed application, obtain approval from the financial authorities, and acquire a temporary practice permit.
Additionally, the scope of temporary practice is limited to audit services commissioned by clients outside of China. Furthermore, such reports do not have legal effect within China, and according to Chinese law, foreign accounting firms are not permitted to substitute for the work that should be conducted by domestic accounting firms and registered accountants.
Therefore, while it is possible for foreign accounting firms to conduct certain audit procedures in mainland China, this does not imply the authority to issue statutory audit reports under Chinese law. Misunderstanding this point can lead to confusion between group audit procedures and statutory audits under domestic law.
4. Relationship with Overseas Listing Audits of Domestic Chinese Companies
When considering the activities of foreign accounting firms in China, attention must also be paid to the audits of domestic companies for overseas listings.
The "Interim Regulations on the Audit Services of Accounting Firms Engaging in the Overseas Listing of Domestic Enterprises" (Cai Kuai [2015] No. 9) issued by the Ministry of Finance establishes special rules regarding the relevant audit services when domestic companies issue and list stocks, bonds, and other securities overseas, either directly or indirectly.
According to these regulations, audit services related to the overseas listing of domestic companies are not included in the scope of temporary practice based on Cai Kuai [2011] No. 4. Therefore, it is not permitted for foreign accounting firms to enter China and conduct audits related to overseas listings through temporary practice.
This system is believed to ensure the reliability of disclosure information of domestic companies in overseas capital markets and to maintain the supervisory capability of Chinese authorities.
Furthermore, in 2024, the "Management Measures for the Activities of Overseas Accounting Organizations in China" (Cai Kuai [2024] No. 23) was issued, establishing a broader management system for the business activities of foreign accounting organizations in China. This indicates that Chinese authorities are placing greater emphasis on governance of cross-border accounting and auditing activities.
5. Comparison with the US System
The US system adopts a structure that is further different from those of Japan and China. There is no nationwide unified accounting law in the US like Japan's Certified Public Accountant Law or China's Certified Public Accountant Law, and the CPA system is regulated by state laws.
However, there is a common basic structure in the Accountancy Acts of each state. That is, assurance services such as audits, reviews, examinations, and attestation services can only be provided by those who hold a valid CPA license or registered CPA firms.
Therefore, the US system can be organized as a license-regulated system based on state law, rather than a business monopoly type like Japan's audit certification services.
Additionally, for audits of SEC-registered companies, it is necessary not only to comply with state CPA laws but also to be a PCAOB-registered accounting firm. As a result, in audits of US public companies, both the state CPA system and the PCAOB system function in a layered manner to ensure audit quality and investor protection.
6. Practical Implications in Cross-Border Group Audits
Comparing the systems of Japan, China, and the US, all aim to ensure the reliability of audit reports, while their legal techniques differ.
Japan has a business monopoly system that limits audit certification services to certified public accountants and audit firms. China limits the issuing entities of statutory audit reports to registered accountants and accounting firms, while providing a limited exception for foreign accounting firms through a temporary practice system. The US regulates the entities that can provide audits and other attestation services through state CPA laws and the PCAOB system.
These differences directly impact the audit systems of international corporate groups. For example, if a US parent company has a Chinese subsidiary, the US audit firm may require audit evidence related to the Chinese subsidiary as part of the group audit. In this case, foreign accounting firms conducting audit procedures in China need to confirm the applicability of the temporary practice system based on Cai Kuai [2011] No. 4.
On the other hand, if a Chinese subsidiary requires a statutory audit report under Chinese domestic law, that report must be issued by registered accountants and accounting firms recognized under Chinese law. Reports prepared by foreign accounting firms for group audit purposes cannot be used as statutory audit reports under Chinese domestic law.
Additionally, it is necessary to carefully consider the relationship with the Certified Public Accountants Act regarding whether foreign CPAs can independently provide audit certification services under Japanese law for Japanese subsidiaries. The legal evaluation differs significantly between being involved as an audit assistant under the direction and supervision of a Japanese CPA or audit firm and providing independent audit certification services.
Conclusion
The answer to the question of whether foreign accounting firms can conduct audit services in China is, "It is possible under certain conditions, but they cannot freely issue statutory audit reports within China."
China's temporary practice system plays an important practical role in cross-border group audits. However, its scope of application is strictly limited, and it is necessary to understand that it is for audit services for foreign clients, requires permission from the financial department, does not constitute legally effective reports within China, and cannot replace the services that domestic accounting firms and registered accountants are required to perform under Chinese law.
Even in the current era where cross-border audits have become commonplace, the audit system is still designed based on the domestic laws of each country. Therefore, in international corporate groups, it is essential to comprehensively examine the qualifications of auditors, the purpose of audit reports, the validity under the laws of each country, and the consistency with group audit standards.
At Mochizuki Consulting, we provide practical advice on cross-border audits, international taxation, overseas subsidiary management, and global compliance, taking into account the differences between Chinese law, Japanese law, and the U.S. system. For Japanese companies entering China, Chinese companies entering Japan, and practical issues related to audits, taxation, and governance of multinational corporate groups, it is important to have experts who understand the systems across jurisdictions.
For those who need our support regarding audits in China, please contact us.