US accounting regulator finds ‘unacceptable rate’ of shortcomings in mainland China audits
- Public Company Accounting Oversight Board found significant deficiencies in first review of audits of mainland Chinese firms listed in the US
- US regulator reached a deal last year to access mainland audit records for the first time
The Public Company Accounting Oversight Board (PCAOB) said on Wednesday that it found an “unacceptable rate” of deficiencies as it carried out its first review of audits of mainland Chinese firms since striking a deal last year to give it access to mainland audit records for the first time.
The US regulator said that it found significant shortcomings in three-quarters of the audits of US-listed mainland firms conducted by PwC in Hong Kong and 100 per cent of the audits conducted by KPMG Huazhen LLP in mainland China last year. The regulator reviewed eight audits in total, or four conducted by each firm in 2022.
However, the inspection reports are not expected to affect the status of about 170 mainland China firms listed on American bourses. US officials had threatened to delist those firms in a long-running dispute over the audit inspections before an agreement was reached between the two nations last year.
“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,” PCAOB Chair Erica Williams said in a statement.
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The shortcomings identified by its staff were “consistent” with the types previously found by the regulator in other first-time inspections globally, the PCAOB said.
“We recognise the inspection process provides a valuable opportunity to improve the quality of our audits,” Raymund Chao, PwC’s Asia-Pacific and China chairman, said in a March 20 letter responding to the PCAOB’s inspection report. “We actively use feedback from internal and external review processes in our ongoing efforts to continuously improve audit quality, and we will address the matters raised in the draft report in a thorough and thoughtful way.”
Firms have up to a year to remediate any deficiencies identified by the regulator. When appropriate, inspectors can refer their findings for enforcement actions, including potential fines, the regulator said.
KPMG said it had taken “appropriate actions” to address the shortcomings raised by the PCAOB’s inspectors.
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“We remain dedicated to evaluating and improving our system of quality management, including monitoring audit quality and implementing changes to our policies and practices,” Jacky Zhou, senior partner at KPMG Huazhen, said in a letter in response to the regulator’s findings.
A showdown over US access to mainland China audit records had been brewing for years, as Chinese officials argued that those working papers contained state secrets. Chinese law had also barred accounting firms from handing their documents to foreign parties without prior permission from Beijing.
The dispute intensified after the passage of the US’ Holding Foreign Companies Accountable Act, which went into effect in late 2021.
The law had threatened to delist nearly 170 mainland companies with a combined market value of US$1.5 trillion if US regulators were not allowed to inspect their audit records.
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The PCAOB reached an agreement with China’s ministry of finance, the China Securities Regulatory Commission (CSRC), in August 2022 and carried out its first inspections of audit firm’s working papers in Hong Kong between September and November of last year.
“Today’s reports are a powerful first step toward accountability,” Williams said. “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. And the power of transparency applies public pressure for firms to improve.”
