The PCAOB has settled disciplinary orders against PKF Hong Kong and three employees for failing to cooperate with an investigation of their audits of a US company based in China. Presently this means that PKF Hong Kong cannot audit a US company.

In a statement, the PCAOB said three people from PKF Hong Kong had refused to cooperate with its demand for testimony, leading it to revoke the firm’s registration for three years.

For the three people involved, the PCAOB’s decision means they can no longer be associated with a public company, or serve in accountancy or financial management capacity for an issuer or broker or dealer, for the same amount of time.

PKF Hong Kong’s said it would not testify because the PCAOB had to get permission from the Chinese authorities through a 2013 Memorandum of Understanding on Enforcement Cooperation (MOU) first.

The PCAOB has said this is not a valid justification, because it does not alter a registered firm’s legal obligation to cooperate with a PCAOB investigation.

"In unambiguous terms, the Sarbanes-Oxley Act and PCAOB rules require registered firms and their associated persons to cooperate with requests for information in Board investigations,", PCAOB chairman James Doty said.

PKF Hong Kong can reapply for registration three years from 12 January 2016.

"As demonstrated here, the PCAOB is prepared to bring enforcement proceedings if parties fail to comply with the cooperation requirements imposed by US law. Failure to cooperate with an investigation frustrates the PCAOB’s ability to protect investors," Doty added.

Writing in his blog, Paul Gillis, a professor of accounting at the Guanghua School of Management, Peking University in Beijing, said this action sends a strong signal to Chinese authorities: the PCAOB is willing to deregister accounting firms that do not cooperate with it.

"I have heard that the PCAOB has issued an Accounting Board Demand, or something similar to it, to the China Big Four firms in December. I do not expect the firms will comply with the demand, setting up a scenario similar to PKF.

"If the PCAOB follows a timetable similar to the PKF case, it suggests that a disciplinary action might take place this coming summer, assuming that the PCAOB and Chinese regulators are unable to reach an agreement on inspections," Gillis said.