For those of you short on time and/or attention span, here’s Public Company Accounting Oversight Board Erica Y. Williams on Bloomberg today discussing the long-awaited inspection results for two firms inspected in 2022: KPMG Huazhen LLP in mainland China [PDF] and PricewaterhouseCoopers in Hong Kong [PDF]. PCAOB inspectors found Part I.A deficiencies in 100% (4/4) of the audit engagements reviewed at KPMG Huazhen and 75% (3/4) of the audit engagements reviewed for PwC Hong Kong. Her statement and a little backstory on why these results are important is below.
Last year, the PCAOB gained historic VIP access to Chinese audit work — granted to inspectors thanks to a legislative threat by Congress to delist Chinese companies if they didn’t allow inspectors to go digging around in there — and as far as we heard these inspections went well. Actually, the PCAOB was pretty quiet on exactly how it went and most of the detailed information about their visits came through the media by way of anonymous sources. The PCAOB did however issue a statement on December 15, 2022 announcing that inspectors gained complete access to inspect and investigate Chinese firms for the first time in history. “Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong,” the news release read. “It is a recognition that, for the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them.”
After the release of the two inspection reports for KPMG Huazhen and PwC Hong Kong today, Chair Williams issued a statement outlining the deficiencies found and reminding auditors for the 1,001st time that the PCAOB is sick of their bullshit. From her statement:
Both reports show unacceptable rates of Part I.A deficiencies, which are deficiencies of such significance that PCAOB staff believe the audit firm failed to obtain sufficient appropriate audit evidence to support its work on the public company’s financial statements or internal control over financial reporting.
The PCAOB inspected a total of eight engagements in 2022 – four at each of the two firms – including the types of engagements to which People’s Republic of China (PRC) authorities had previously denied access, such as large state-owned enterprises and issuers in sensitive industries.
PCAOB inspectors found Part I.A deficiencies in 100% (four of four) of the audit engagements reviewed at KPMG Huazhen and 75% (three of four) of the audit engagements reviewed for PwC Hong Kong.
As I have said before, 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.
Last year’s historic inspections of Chinese audit work are only the beginning, she said.
Our enforcement teams continue to pursue investigations, and inspectors have begun fieldwork for 2023’s inspections. We anticipate fieldwork will continue off and on throughout most of the year, which is common practice for inspections such as these in jurisdictions around the world.
She goes on to give a shoutout to Congress for passing the Holding Foreign Companies Accountable Act (HFCAA), without which these thorough inspections would not have happened. That legislation was said to send China a clear signal that access to U.S. capital markets is a privilege and not a right, contingent on allowing inspections of the audit work performed on Chinese companies listed in these markets.
“Should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access – in any way and at any time – the Board will act immediately to consider the need to issue a new determination,” she said.
She wraps the statement up thanking “the hardworking inspectors, investigators, and PCAOB staff who continue this important work on behalf of investors every day.”
PCAOB Releases 2022 Inspection Reports for Mainland China, Hong Kong Audit Firms [PCAOB]