- The Public Company Accounting Oversight Board releases inspection reports revealing major deficiencies in KPMG Huazhen LLP and PwC Hong Kong’s audit work in China and Hong Kong.
- Concerns were raised about the accuracy and reliability of financial statements and internal controls of Chinese and Hong Kong-based companies listed on US stock exchanges.
- Remediation process and possible enforcement actions to be taken by the PCAOB and ongoing inspection fieldwork for 2023.
On May 10, the Public Company Accounting Oversight Board (PCAOB) released inspection reports highlighting significant deficiencies in the audit works of KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers (PwC) in Hong Kong. These findings raise concerns about the accuracy and reliability of financial statements and internal controls of Chinese and Hong Kong-based companies listed on US stock exchanges.
The PCAOB, which received access to auditors’ books for the first time, reviewed eight engagements in 2022, including state-owned enterprises and sensitive industries previously denied entry by the People’s Republic of China (PRC) authorities.
The inspection reports revealed alarming rates of deficiencies, which indicate that the audit firms needed to obtain sufficient appropriate audit evidence to support their work on the financial statements or internal control over the financial reporting of the public companies.
High Rates Of Deficiencies And Remediation Process
At KPMG Huazhen, all four audit engagements reviewed were found to have deficiencies. In comparison, PwC Hong Kong had three out of four meetings with such shortcomings, accounting for 100% and 75% of their reviewed arrangements, respectively.
PCAOB Chairman expressed his concerns, stating:
“Any deficiencies are unacceptable. At the same time, it is not unexpected to find such high rates of deficiencies in jurisdictions that are being inspected for the first time. And the deficiencies identified by PCAOB staff at the firms in mainland China and Hong Kong are consistent with the types and number of findings the PCAOB has encountered in other first-time inspections around the world.”
The statement read that the inspection reports serve as an essential step toward accountability and transparency. By shedding light on these deficiencies, investors, audit committees, and potential clients can make informed decisions and pressurize firms to improve their audit practices.
The American overseer of public companies audits asserted that the remediation process is also vital to holding firms accountable. Although quality control deficiencies are not initially included in public inspection reports, firms have one year to rectify them. Failure to do so to the Board’s satisfaction will result in the public disclosure of these deficiencies.
The PCAOB asserts that it will also refer inspection findings to its enforcement team for possible action when necessary. Violations discovered may lead to sanctions, including substantial monetary penalties and restrictions on future audit activities for bad actors.
Commitment to Enhance Audit Quality and Regain Investor Trust
CNN reported that KPMG Huazhen acknowledged the findings of the PCAOB and stated that it had taken steps to address the identified issues. The firm emphasized its commitment to audit quality and ongoing investments in innovation, technology, people, and training. The firm said:
“Audit quality is fundamental to our business, and we continue to invest heavily in innovation, technology, people, and training to create a stronger, more resilient audit business.”
PwC Hong Kong viewed the PCAOB inspection as an essential milestone in the cooperation between China and US regulators and for US capital markets. It added:
“Although the PCAOB raises several issues, the report also states that concerning the audits inspected, none were found to have an incorrect opinion on financial statements.”
The firm expressed its commitment to work with the PCAOB to address the raised concerns and continued substantial investments to enhance audit quality.
The PCAOB’s work in mainland China and Hong Kong is ongoing. Inspection fieldwork for 2023 has commenced, with investigations by enforcement teams continuing to address potential violations. The PCAOB remains committed to complete access and investigations without exceptions or loopholes.
Emphasizing the significance of their efforts, the Chairman stated:
“Protecting investors is what this is all about. The release of today’s reports is yet another sign that investors are more protected because of Congress’ leadership in passing the HFCAA (Holding Foreign Companies Accountable Act).”
The PCAOB’s inspection reports underscore the need for improved audit practices and accountability in Chinese and Hong Kong companies listed on US stock exchanges. The findings highlight the importance of transparency and serve as a wake-up call for auditors and firms to enhance their standards and regain investors’ trust.
