The Public Company Accounting Oversight Board
(PCAOB) has published an alert to raise auditors’ awareness of
risks when auditing firms in emerging markets such as China.
Staff Audit Practice Alert No. 8: Audit
Risks in Certain Emerging Markets focuses on the risks of
misstatement due to fraud, auditors’ responsibilities for
addressing those risks and other auditor responsibilities under
PCAOB auditing standards.
According to the board, at least 24 companies
that are headquartered in China filed Forms 8-K with the Securities
and Exchange Commission reporting auditor resignations, accounting
irregularities or both.
The board’s fraud risk concerns also include
discrepancies between a company’s financial records and audit
evidence obtained from third parties; auditor difficulties in
confirming cash and receivable balances; and the recognition of
revenue from contracts or customers whose existence cannot be
“While this practice alert is for auditors, it
also is a good reminder to investors and audit committees of the
heightened fraud risk found in some emerging market companies that
trade on US exchanges, especially those in countries where the
PCAOB is blocked from conducting inspections of auditors’ work,”
PCAOB chairman James Doty said.
Chinese and US authorities have been at
loggerheads over cross-border inspections because US regulators are
not allowed to inspect Chinese audit firms.
Recently, the Securities and Exchange
Commission asked a US federal court to force a Chinese affiliate of
Deloitte, D&T Shanghai, to disclose documents relating to its
former client Longtop Financial Technologies after the firm failed
to respond to a US District Court of Columbia subpoena.