The US Public Company Accounting Oversight
Board (PCAOB) has warned US audit firms to be careful they are
complying with PCAOB standards when issuing audit reports based on
the work of audit firms or individuals based outside the

PCAOB inspectors have identified cases where
US firms have issued audit reports on Chinese, Hong Kong and
Taiwanese companies that are listed in the US, despite the fact
that none of the firm’s partners or employees traveled to the
region during the audit.

Almost all of the audit procedures were
performed by local accounting firms and consultants retained by the
US audit firms.

PCAOB director George Diacont said investors
are put at risk when the firm issuing the audit report has
performed none of the procedures itself, or cannot effectively
communicate with those conducting significant audit procedures
because of language barriers.

The PCAOB staff practice alert includes:

  • A reminder to registered
    firms of their obligations when using the work of other firms or
    using assistants engaged from outside the firm;
  • The description of the
    circumstances under which the firm issuing the audit report may use
    the work and reports of another auditor, and,
  • Notes that auditors who
    engage assistants from outside the firm are governed by the same
    standards regarding planning the audit and supervising assistants
    that apply when audit work is performed by assistants who are
    partners of, or employed by, the auditor’s firm.

Tension between

The PCAOB’s warning to US firms that rely on
assistance from Chinese auditors follows an ongoing standoff
between the US watchdog and its Chinese counterpart, the Ministry
of Finance.

The PCAOB is required by law to conduct
inspections of all firms that audit companies listed on the US
capital markets at least once every three years, no matter where
the firm is based.

But the Chinese Ministry of Finance is
refusing to allow PCAOB inspectors to operate in China, saying they
should rely on inspections conducted by the Chinese regulator.


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