China-based Accounting Firms Sanctioned for Inaccurate Audits and Personnel Failures

Steven Lofchie Commentary by Steven Lofchie

Three China-based accounting firms and four individuals settled charges with the Public Company Accounting Oversight Board ("PCAOB") for issuing inaccurate audit reports and for violations of quality control standards related to integrity and personnel management.

In one Order, the PCAOB found that the accounting firm and several management personnel issued an "unqualified audit opinion" on financial statements of one issuer over a three-year period, where the auditor knew that their audit did not meet PCAOB standards and that the audit firm was not independent of the issuer. The PCAOB found that both the firm and the engagement quality reviewing team improperly relied on a predecessor's work papers and that they likewise failed to co-operate with the PCAOB investigation. In connection with this Order, the firm was subject to a $750,000 penalty and a ban on taking new PCAOB audit clients. The four associated individuals were censured and were required to pay fines, with the highest individual fine set at $100,000.

The other Orders (see here and here) were against two firms within the PricewaterhouseCoopers accounting network, one firm based in Shanghai and the other in Hong Kong. In separate Orders, the PCAOB found violations of quality control standards related to integrity and personnel management. The PCAOB found "improper answer sharing," involving staff providing or receiving answers from one another through unauthorized technology. In addition, the PCAOB determined that the two firms failed to monitor internal training tests required of the firms' audit professionals to maintain their professional certifications. To settle the charges, the two firms agreed to (i) a censure, (ii) pay a combined $7,000,000 civil monetary penalty and (iii) comply with additional remedial actions.

Commentary

The PCAOB and the SEC have been warning accounting firms of their obligations when auditing foreign issuers located in China. (See here for a list of stories concerning SEC/PCAOB actions involving the regulation of audit firms based in China.) It would not be surprising if more such enforcement actions follow.

 

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