PCAOB Sanctions Chinese Auditors for Audit Deficiencies

The Public Company Accounting Oversight Board ("PCAOB") sanctioned three partners of a China-based audit firm for audit failures that preceded a significant restatement of a company's reported revenue and net accounts receivable.

According to the Order, the three partners violated PCAOB standards in connection with their audit of a Chinese education company. The PCAOB found that nearly 97% of the company's net revenue was attributable to tuition transactions. The PCAOB found that the partners did not gather enough audit evidence related to the company's revenue. Despite identifying a fraud risk, specifically the risk that the company might record revenue from fictitious students and noticing deficiencies in the company's internal controls, two of the auditors concluded these issues would not impact their decision to rely on the reported revenue figures. The PCAOB also found that the auditors failed to properly assess the reasonableness of the company's allowance for doubtful accounts finding that they did not (i) obtain an adequate understanding of how management developed the estimate, (ii) appropriately evaluate its reasonableness and (iii) adequately consider evidence indicating that the estimate might not be reasonable.

The PCAOB found that a third auditor failed to supervise properly the IT portion on the audit, missing several deficiencies in the company's procedures. The PCAOB concluded that this failure led to the auditors' missing inflated revenue that resulted from fictitious student account data in the company’s systems.

To settle the charges, the three audit partners agreed to (i) a censure, (ii) civil money penalties in the amounts of $75,000, $50,000 and $25,000 and (iii) undertake remedial measures.