Image source: Visual China
BEIJING, May 11-- U.S. accounting watchdog Public Company Accounting Oversight Board (PCAOB) on Wednesday EST released its 2022 inspection reports for two Chinese public accounting firms: KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers in Hong Kong.
While there were “unacceptable” rates of audit deficiencies in both reports, it was “not unexpected” to find them in jurisdictions first inspected. "The deficiencies identified by PCAOB staff at the firms in mainland China and Hong Kong are consistent with the type and number of findings the PCAOB has encountered in other first-time inspections around the world." PCAOB Chair Erica Y. Williams said after the release of the inspection reports on Wednesday.
"Today's reports are a powerful first step toward accountability. By shining a light on deficiencies, our inspection reports provide investors, audit committees, and potential clients with important information so they can make informed decisions and hold firms accountable," said Williams.
As a rule of PCAOB, audit firms can submit a corrective action report in response to audit deficiencies and quality control problems identified by the PCAOB after receiving an inspection report.
"If violations are found, our enforcement staff will not hesitate to recommend sanctions, including imposing significant money penalties and barring bad actors from performing future audits," Williams said.
Williams noted that 2022 was only the beginning of the PCAOB's efforts to inspect and investigate firms in mainland China and Hong Kong. "Our enforcement teams continue to pursue investigations, and inspectors have begun fieldwork for 2023’s inspections,” he added.
"The two firms we inspected in 2022 audited 40% of the total market share of U.S.-listed companies audited by Hong Kong and mainland China firms, and we are on track to hit 99% of the total market share by the end of this year," Williams stressed.
From September to November 2022, 32 PCAOB staff members conducted a nine-week on-site inspection and investigation into KPMG Huazhen in Beijing and PwC in Hong Kong, selecting a total of eight audit engagements related to U.S.-listed Chinese firms three times and reviewing thousands of pages of audit documents.
The PCAOB believed that the process of the inspection was in line with the established standards and the complete audit documents were accessible. Accordingly it reversed the determination made in 2021- the failure to inspect or investigate the accounting services of the U.S.-listed Chinese firms.
The basis for this inspection is the audit supervision cooperation agreement signed by the China Securities Regulatory Commission, the Ministry of Finance and the PCAOB on August 26, 2022. Since the Holding Foreign Company Accountable Act (HFCAA) came into effect in December 2020, the companies will be delisted from U.S. stock exchanges by SEC if the PCAOB fails to inspect the accounting firm of the U.S.-listed companies for three consecutive years.
More than 170 Chinese companies that issued annual reports for 2021 have once been placed on the SEC's "quasi-delisting list". Yet the compliance clock is reset as the determinations were withdrawn and the 2022 inspection process met the criteria.
