By the end of June 2008, 39 accounting firms incorporated in Mainland China and 46 in Hong Kong had been registered with the PCAOB. In particular, the member offices in the PRC Mainland and Hong Kong of the “big four” international accounting firms, i.e. PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte provide auditing services for 11 Chinese H-share companies[④] and 4 overseas Chinese-funded holding companies[⑤] listed in the U.S. （hereinafter“Chinese companies listed in the U.S.”）。

　　Based on the pertinent provisions in the prevailing laws and regulations of the PRC, if the PCAOB makes a request to inspect the auditing working papers of the above domestic accounting firms, Chinese companies listed in the U.S. and appropriate accounting firms might be faced with substantial legal risks.

　　I. Risk of violating China’s Law on Guarding State Secrets

　　In the PRC, guarding state secrets is a statutory obligation for citizens, legal persons and other organisations. Article 21 of the Law on Guarding State Secrets of the PRC （hereinafter the “Law on Guarding State Secrets”）[⑥]stipulates, “When state secrets have to be furnished for the benefit of contacts and cooperation with foreign countries, approval must be obtained beforehand in line with the prescribed procedures.” Article 22 of the Measures for Implementation of the Law on Guarding State Secrets[⑦] stipulates, “In foreign contact and cooperation, when the other party requests state secrets for a justifiable reason and through a justifiable channel, such request shall be submitted to the competent authority for approval as stipulated on an equal and mutual benefit basis, and the other party shall be required in a certain form to assume the non-disclosure obligation.”

　　For the purpose of the above statutory obligation of guarding state secrets, a Chinese company listed in the U.S. should consider the following two issues. First, does the information provided by the company to the external auditor involve any state secret? All Chinese companies listed in the U.S. are state-owned holding enterprises, specialising mainly in energy, traffic, communication, petrochemical and metallurgical industries, and some are even industry leaders. It is based on this special position that the accounting information of such listed companies involves considerable industry-sensitive information. For example, a listed company in the energy industry possesses information on oil reserves, oil and gas pipeline distribution, oil storage and refining and chemical bases; one in the communication industry possesses communication guarantee information of secretive institutions and important departments, and information on interconnection and inter-network settlement between telecom operators. No definite criteria have been established as to which of such sensitive information is classified as commercial secret and which is classified as state secret.