How to Satisfy the Audit Committee Financial Expert Requirement for a US IPO

The SEC’s Division of Corporation Finance has notably increased the frequency of comment letters targeting the Audit Committee Financial Expert (ACFE) designation in US IPO registration statements filed by China-based issuers since Q3 2024. According to SEC filing data compiled by Audit Analytics, 42% of F-1 amendments filed by PRC companies in the first half of 2025 included at least one round of ACFE-specific comments, up from 28% in the same period of 2023. This heightened scrutiny coincides with the PCAOB’s continued access to inspect audit workpapers in mainland China and Hong Kong under the 2022 Holding Foreign Companies Accountable Act (HFCAA) framework, which has forced issuers to demonstrate not just compliance but substantive expertise on their audit committees. For a Cayman Islands or Hong Kong holding company pursuing a Nasdaq or NYSE listing, the ACFE requirement under Item 407(d)(5) of Regulation S-K is no longer a checkbox exercise — it demands a documented, defensible rationale that withstands both SEC review and subsequent shareholder scrutiny.

The Regulatory Foundation and the SEC’s Evolving Expectations

The Core Requirement Under Item 407(d)(5) of Regulation S-K

The SEC mandates that every listed company disclose whether its audit committee includes at least one financial expert, and if not, explain why. Item 407(d)(5)(ii) defines an ACFE as a person who possesses all of the following attributes: an understanding of generally accepted accounting principles (GAAP) and financial statements; the ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves; experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues generally comparable to the breadth and complexity of issues the registrant’s financial statements raise; and an understanding of internal controls and procedures for financial reporting. For a US IPO of a China-based company, the “breadth and level of complexity” standard is particularly demanding — the ACFE must demonstrate familiarity with PRC GAAP conversion to US GAAP, VIE consolidation mechanics under ASC 810-10-15-8, and the regulatory accounting treatments imposed by the CSRC and the Ministry of Finance.

The PCAOB Inspection Context and Its Impact on ACFE Qualifications

The PCAOB’s 2024 inspection report on China-based audit firms, released in March 2025, found a deficiency rate of 15.3% across 98 audit engagements inspected in Hong Kong and mainland China. This figure, while improved from 21.7% in 2022, remains significantly higher than the 9.8% deficiency rate for US-based firms. SEC comment letters now routinely ask ACFE candidates to describe their specific experience with PCAOB-identified audit deficiencies, particularly in areas such as revenue recognition, related-party transactions, and impairment testing of long-lived assets. The SEC Staff’s rationale is direct: an audit committee that cannot critically evaluate the auditor’s work in these high-risk areas cannot fulfill its oversight function. Issuers should expect a comment requesting a detailed breakdown of the ACFE’s prior involvement with PCAOB inspections, including the number of engagements, the jurisdictions involved, and the nature of any findings.

Structuring the ACFE Profile for a China-Based Issuer

The Three Archetypes of Qualified ACFE Candidates

The SEC does not prescribe a single qualification path, but three archetypes have emerged from successful F-1 filings by China-based issuers in 2024 and 2025. The first is the US-trained CPA with Big Four experience who has served as an audit engagement partner on at least three PRC-based public company engagements. This candidate must disclose the specific issuers, the years of service, and the accounting issues addressed — general references to “experience with China-based companies” will attract a comment letter. The second archetype is a senior finance executive from a comparable China-based US-listed company, such as a former CFO or CAO of a Nasdaq-listed VIE structure. The SEC will look for evidence that this executive’s experience is “comparable” in complexity — a candidate from a single-business-line company may not qualify for an issuer with multiple VIE subsidiaries across different industries. The third archetype, less common but increasingly accepted, is a US-based accounting professor with a research focus on cross-border financial reporting. The SEC requires this candidate to demonstrate practical, not just academic, experience — typically through service on the audit committee of another public company or through consulting engagements involving US GAAP conversion.

The VIE Structure Disclosure and Its Impact on ACFE Qualifications

For issuers using a variable interest entity (VIE) structure, the ACFE must demonstrate specific expertise in ASC 810-10 consolidation rules for entities that do not have equity ownership control. The SEC’s December 2024 Staff Accounting Bulletin No. 121 (SAB 121) guidance on VIE disclosures requires audit committees to evaluate whether the primary beneficiary determination remains appropriate at each reporting date. A qualified ACFE for a VIE-structured issuer should have direct experience either auditing or preparing VIE consolidation schedules, including the identification of variable interests, the calculation of expected losses and residual returns, and the documentation of the power-to-direct analysis. The prospectus should explicitly state the ACFE’s experience with VIE accounting, including the number of VIE structures they have evaluated and the specific accounting issues addressed. Issuers that omit this detail from the ACFE disclosure have received SEC comments requesting it within 10 business days of the initial filing.

The Disclosure Mechanics and SEC Comment Letter Response Strategy

Drafting the ACFE Disclosure in the F-1 Registration Statement

The ACFE disclosure must appear in the proxy statement section of the F-1, typically under “Audit Committee” or “Corporate Governance.” Item 407(d)(5)(iii) requires the registrant to disclose the name of the ACFE and indicate whether the person is “independent” as defined under the applicable exchange rules. For Nasdaq-listed issuers, independence is defined under Listing Rule 5605(a)(2), which requires that the audit committee member not accept any consulting, advisory, or other compensatory fee from the issuer, other than for board service. The disclosure should include a detailed narrative of the ACFE’s education, professional certifications, and specific work experience that demonstrates each of the five attributes listed in the rule. The SEC Staff has rejected generic disclosures that simply restate the regulatory language — for example, stating that the candidate “understands GAAP” without providing the specific context of that understanding. A defensible disclosure might read: “Mr. Zhang served as audit engagement partner on three US-listed VIE-structured companies between 2018 and 2024, where he supervised the preparation of consolidated financial statements under US GAAP, including the application of ASC 810-10 to variable interest entities, and participated in PCAOB inspections resulting in zero adverse findings in two of the three engagements.”

Responding to SEC Comment Letters on ACFE Qualifications

When the SEC issues a comment letter challenging the ACFE designation, the issuer must respond with a detailed, fact-specific explanation rather than a legal argument. The SEC’s typical comment reads: “We note your disclosure that Mr. Li qualifies as an audit committee financial expert. Please describe in greater detail the specific experience that supports this conclusion, including the number of public company audits he has supervised, the accounting issues addressed, and his familiarity with the accounting treatment of the VIE structure used by your company.” The response should be structured in three parts: first, a recitation of the specific experience; second, a mapping of that experience to each of the five attributes in Item 407(d)(5)(ii); and third, a comparison of the complexity of the ACFE’s prior experience to the complexity of the issuer’s financial statements. The SEC does not accept hypothetical qualifications — if the ACFE has not previously worked with VIE structures, the issuer should either find a different candidate or disclose the limitation and explain how the committee will compensate for it, such as through external advisor engagement under Section 10A(m) of the Securities Exchange Act of 1934.

Cross-Border Considerations and the Hong Kong Dual-Listing Angle

The SFC and HKEX Parallel Requirements for ACFE Equivalents

For issuers pursuing a dual listing on both Nasdaq and the Hong Kong Stock Exchange (HKEX), the ACFE requirement under US rules intersects with HKEX Listing Rule 3.10(2), which requires the audit committee to comprise at least three members, all of whom must be independent non-executive directors (INEDs). While HKEX does not mandate a specific “financial expert” designation, the Listing Committee will assess whether the audit committee collectively possesses sufficient financial literacy. In practice, the HKEX expects at least one INED to have “appropriate professional qualifications or accounting or related financial management expertise,” as defined in Rule 3.10(2). The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (Chapter 571) further requires sponsors to assess whether the issuer’s audit committee can properly oversee the financial reporting process. For a dual-listed issuer, the same individual can serve as both the US ACFE and the HKEX-qualified financial expert, provided the person meets both sets of independence and qualification standards. The prospectus should disclose the dual compliance in a single integrated section to avoid redundancy and reduce the risk of conflicting disclosures.

The Practical Challenge of Finding Qualified Candidates in Hong Kong

The pool of individuals who satisfy both the SEC’s ACFE requirements and the HKEX’s independence rules is limited. According to a 2024 survey by the Hong Kong Institute of CPAs, only 38% of Hong Kong-based CPAs with Big Four experience have served on a US-listed company’s audit committee, and of those, only 22% have direct experience with VIE structures. This scarcity has led issuers to consider candidates from other jurisdictions, such as Singapore or the United Kingdom, but the SEC’s preference for US GAAP experience effectively narrows the pool to individuals trained in the United States or in US GAAP-compliant jurisdictions. Issuers should begin the ACFE search at least six months before the expected F-1 filing date, as the due diligence process — including background checks, independence verification, and SEC qualification assessment — typically takes 8-12 weeks. The SFC’s Licensing Information System can be used to verify a candidate’s regulatory standing in Hong Kong, but the SEC does not maintain a comparable database for ACFE qualifications, placing the burden of verification squarely on the issuer and its counsel.

Actionable Takeaways

1. Begin the ACFE candidate search at least six months before the F-1 filing and document every element of the candidate’s experience against the five attributes in Item 407(d)(5)(ii) of Regulation S-K, with particular emphasis on VIE consolidation experience if applicable.
2. Draft the ACFE disclosure as a narrative that maps specific prior engagements to the complexity of the issuer’s financial statements, avoiding generic restatements of the regulatory language.
3. Prepare a response template for the expected SEC comment letter that includes a three-part structure: experience recitation, attribute mapping, and complexity comparison.
4. For dual-listed issuers, integrate the US ACFE disclosure with the HKEX Listing Rule 3.10(2) financial literacy requirement in a single section of the prospectus.
5. Verify the candidate’s independence under both Nasdaq Listing Rule 5605(a)(2) and HKEX Rule 3.13 before filing, and document the independence analysis in the board minutes.