Audits carried out by the Chinese arms of KPMG and PwC had an “unacceptable” number of flaws, US watchdogs said on Wednesday, as they vowed to expand examinations of major accounting firms in the country.
The Public Company Accounting Oversight Board found multiple deficiencies in all four audits examined by KPMG Huazhen, the Big Four firm’s mainland China operation.
Three of the four audits examined at PwC’s Hong Kong operations also had multiple deficiencies, and the PCAOB found two cases where PwC staff had financial ties to the company it was auditing.
The two companies were first investigated by US regulators late last year under an agreement with China. The PCAOB was created to oversee the auditors of US-listed companies, wherever they are in the world, but the inspectors were blocked by Beijing until Washington threatened to delist Chinese companies from US stock exchanges.
“Both reports show unacceptable rates of defects,” said Erica Williams, PCAOB chair. “The fact that we found so many deficiencies is a sign that the inspection process has worked, and now we can get on with the job of holding companies accountable and driving audit quality.”
The PCAOB inspection reports did not name the companies whose audits came under scrutiny, but Williams said the agency selected state-owned enterprises and companies in “sensitive” industries.
KPMG Huazhen and PwC together audit about 40 percent of U.S.-listed Chinese stocks by market capitalization, Williams said, and a new round of inspections this year will target companies that cover nearly all of the remaining 60 percent.
“We’re going to be looking at more companies and more alliances,” she said, “and we’re going to take advantage all year long.”
Deficiencies identified by auditors at PwC and KPMG Huazhen included failures to understand the company’s IT systems, poor procedures for checking group revenues and incomplete documentation.
However, Williams said it is not unexpected to find high levels of deficiencies in jurisdictions being inspected for the first time, and audit firms can be expected to improve over time. One in three audits the PCAOB examined last year found deficiencies.
“Although a number of issues have been raised by the PCAOB, the report also stated that in terms of the audits examined, no misstatement of the financial statements was found,” PwC Hong Kong said. “We are working with the PCAOB to resolve the issues raised. . . And we continue to make significant investments to enhance our audit quality.”
KPMG Huazen said it has addressed the issues raised and is investing in technology and training.
Chinese regulators are also working to improve the quality of audits in the country, in addition to addressing concerns about sensitive information being leaked out of the country by foreign audit firms. The Finance Ministry shut down Deloitte’s Beijing operation for three months in March for “serious deficiencies” in its audit of bad-debt manager China Huarong Asset Management.
The Big Four global accounting firms have spent decades expanding their operations in China, but these moves have put their market-leading position at risk.
Beijing has also curtailed foreign access to databases containing Chinese corporate information. The offices of consultancy and due diligence firms Bain & Company, Mintz and Capvision have been raided in recent months.
