Over the past decade, waves of Chinese companies flocked to U.S. and other North American stock exchanges in search of much-needed capital to support their burgeoning businesses and economy. Chinese companies were met with an insatiable appetite by U.S. investors to tap into the nearly untouched array of Chinese businesses that were becoming accessible on a regular basis.

Many of the Chinese companies gaining access to U.S. exchanges did so through various techniques, including reverse mergers and variable interest entities, which enabled them to evade much of the normal scrutiny that companies must typically undergo when listing on a stock exchange through the initial public offering process. However, because all companies listed on U.S. financial markets, including those headquartered in China, are subject to financial reporting rules in accordance with the regulations of the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB), a clash has arisen between Chinese and U.S. regulators surrounding the extent to which U.S. regulators can demand audit work papers and supporting documentation.

Financial reporting regulation for public companies in the U.S. is handled primarily by the SEC, which oversees companies listed on financial markets with the objective to protect investors and provide transparent, reliable financial information. Simply put, public companies are required to submit forms to the SEC (e.g., Form 10-K, Form 10-Q, Form 8-K, etc.). Some are required to be certified by an independent auditor to opine that the financial condition of the company is being accurately presented and that required disclosures are made.

Following financial accounting scandals at companies like Enron, Congress established the PCAOB, a nonprofit corporation that acts to oversee audits and auditors specifically. The PCAOB reports to the SEC and the two organizations work in tandem.