US watchdog finds deficiencies in China audits

May 12, 2023

The US Public Company Accounting Oversight Board (PCAOB) has released the findings of its inspections of audits performed by KPMG in China and PricewaterhouseCoopers (PwC) in Hong Kong, following the board's first access to Chinese company auditors' records last year.

The audits were conducted on US-listed Chinese companies. The PCAOB found "unacceptable rates" of deficiencies in both firms, meaning that auditors failed to obtain sufficient evidence to substantiate the companies' financial statements.

These types of deficiencies, referred to as 'Part I.A deficiencies,' were found in all four engagements reviewed at KPMG Huazhen and in three of the four engagements reviewed for PwC Hong Kong.

The PCAOB inspected eight engagements in total, including engagements that the Chinese authorities had previously denied access to, such as large state-owned enterprises and issuers in sensitive industries.

Access to Chinese auditors' records was secured under the Holding Foreign Companies Accountable Act (HFCAA), passed by the US Congress last year. PCAOB Chair Erica Williams commented that these findings were not unexpected given that it is common to find high rates of deficiencies in jurisdictions being inspected for the first time.

The PCAOB's release of these inspection reports marks the beginning of the process of holding firms accountable for fixing these deficiencies. The reports provide investors, audit committees, and potential clients with important information so they can make informed decisions and hold firms accountable.

The remediation process will also be used to hold firms accountable for fixing deficiencies, with one year given to firms to remediate any deficiencies. The PCAOB inspectors will refer inspection findings to the enforcement team for possible action where appropriate.

Williams emphasized that if PRC authorities obstruct or fail to facilitate the PCAOB's access, "the Board will act immediately to consider the need to issue a new determination."

Last year was only the beginning of the PCAOB's work to inspect and investigate firms in mainland China and Hong Kong, with fieldwork for 2023's inspections already underway. The PCAOB is prioritizing inspections that are the most relevant to investors in US markets, intending to protect investors.

Read Minerva's previous coverage of ESG developments in China:

https://www.old.manifest.co.uk/ifrs-builds-global-reach-with-office-in-china/