Public Company Accounting Oversight Board (PCAOB) chair, Erica Williams offered her remarks after the PCAOB released inspection reports for two firms inspected in 2022: KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers in Hong Kong.
Williams said: “Thanks to the leadership of the U.S. Congress in passing the Holding Foreign Companies Accountable Act (HFCAA), last year, the PCAOB secured complete access to inspect registered public accounting firms headquartered in mainland China and Hong Kong for the first time in history.
“The PCAOB is releasing the inspection reports for both 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.
“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.
“The fact that our inspectors found these deficiencies is a sign that the HFCAA was effective and the inspection process worked as it is supposed to. We identified problems so now we can begin the work of holding firms accountable to fix them.
“The reports are a powerful first step toward accountability. By shining a light on deficiencies, our inspection reports provide investors, audit committees, and potential clients with important information so they can make informed decisions and hold firms accountable. And the power of transparency applies public pressure for firms to improve.
“The remediation process is another tool we use to hold firms accountable for fixing deficiencies. By law, public inspection reports do not initially include quality control deficiencies that inspectors find. Instead, firms have one year to remediate those deficiencies. If they don’t remediate those deficiencies to the Board’s satisfaction, we make them public.
“Finally, where appropriate, our inspectors will refer inspection findings to our enforcement team for possible action. If violations are found, our enforcement staff will not hesitate to recommend sanctions, including imposing significant money penalties and barring bad actors from performing future audits.”