The PCAOB said it found an "unacceptable rate" of deficiencies in the KPMG and PwC audits of US listed Chinese companies it reviewed last year.
The US PCAOB (Public Company Accounting Oversight Board) has called out the Chinese arms of KPMG and PwC for an "unacceptable" number of deficiencies in their audits of US-listed Chinese companies.
The PCAOB inspected a total of eight engagements in 2022 – four at each of the two firms – including the types of engagements to which Chinese authorities had previously denied access, such as large state-owned enterprises and issuers in sensitive industries.
The deficiencies were outlined in newly released inspection reports for two firms inspected in 2022: KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers in Hong Kong.
"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," PCAOB chair Erica Williams said in a statement on Wednesday (10 May).
PCAOB inspectors found deficiencies in all four KPMG audit engagements and three of PwC's four audit engagements. The two firms represent 40 percent of the market share of US-listed companies audited by Hong Kong and mainland China firms.
"As I have said before, any deficiencies are unacceptable," Williams said. "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."
The deficiencies identified at both firms are consistent with the types and number of findings the PCAOB has encountered in other first-time inspections around the world, she added.
Williams noted that the identification of the deficiencies proves that the HFCAA (Holding Foreign Companies Accountable Act)
was "effective" and the inspection process "worked as it is supposed to".
The HFCAA was passed in 2020, allowing regulators to delist Chinese companies from US exchanges if they do not allow the PCAOB to review their audit records for three consecutive years.
Williams said the inspection reports are a "powerful first step toward accountability", as they shine a light on deficiencies and provide investors, audit committees, and potential clients with decision-useful information. "The power of transparency applies public pressure for firms to improve."
The PCAOB also has a remediation process, under which KPMG and PwC have one year to remediate quality control deficiencies, failing which the deficiencies can be made public. The inspection findings may also be referred to the PCAOB's enforcement team for possible action, where appropriate.
Williams said last year was "only the beginning" of the PCAOB's work to inspect and investigate firms in mainland China and Hong Kong, and that its enforcement teams have already begun fieldwork for 2023 this year's inspections.
PwC in Hong Kong said it is working with the PCAOB to address the issues raised and noted the inspection report marks an important milestone for US and Chinese cooperation. KPMG Huazhen in China said it has taken steps to address the issues identified by the PCAOB.