Imposing $7.9 Million in Total Fines, PCAOB Sanctions Three China-Based Firms and Four Individuals in Historic Settlements
Hundreds of individuals at PwC China and PwC Hong Kong engaged in training exam misconduct; mainland China-based firm, Shandong Haoxin, and four of its associated persons violated U.S. securities laws and PCAOB rules and standards
The Public Company Accounting Oversight Board (PCAOB) today announced three settled disciplinary orders sanctioning three China-based firms and four individuals for violations of the U.S. securities laws and PCAOB rules and standards.
These are the first enforcement settlements with mainland Chinese and Hong Kong firms since the PCAOB secured historic access to inspect and investigate firms headquartered in China and Hong Kong in 2022. The sanctions include the highest civil money penalty the Board has imposed against a China-based firm and one of the highest penalties the Board has imposed against any firm. The sanctions also include a requirement – for the first time ever in a Board disciplinary order – that a China-based firm retain an independent monitor.
“The days of China-based firms evading accountability are over. The PCAOB will take action to protect investors on U.S. markets and impose tough sanctions against anyone who violates PCAOB rules and standards, no matter where they are located,” said PCAOB Chair Erica Y. Williams. “I want to thank the U.S. Congress for its leadership in passing the Holding Foreign Companies Accountable Act, which created the leverage for the PCAOB to secure the historic access which made these enforcement actions possible.”
The orders are for the following:
Two disciplinary orders imposing a total of $7 million in penalties against two registered public accounting firms within the PwC global network, Shanghai-based PricewaterhouseCoopers Zhong Tian, LLP (“PwC China”) and Hong Kong-based PricewaterhouseCoopers (“PwC Hong Kong”), for violating PCAOB quality control standards related to integrity and personnel management; and
A disciplinary order imposing immediate practice limitations (including prohibitions on accepting new PCAOB audit clients), an independent monitor to improve practices and ensure compliance, $940,000 in fines, and bars against individuals at Shandong Haoxin Certified Public Accountants Co., Ltd. (“Haoxin”), a mainland China-based registered public accounting firm, and four of its associated persons for violations that include issuing a false audit report, failing to maintain independence from their issuer client, and improperly adopting the work of another accounting firm as their own.
“The Board’s groundbreaking sanctions on these two PwC affiliates and Haoxin demonstrate the global reach of the PCAOB’s inspection and enforcement programs and its commitment to rooting out misconduct, wherever it occurs,” said Robert E. Rice, PCAOB Director of Enforcement and Investigations. “These matters should send the message to all registered firms and their associated persons, wherever located, that the PCAOB will continue to be rigorous in its approach to enforcement matters and will employ all sanctions at its disposal to deter misconduct and improve audit quality.”
The PCAOB appreciates the assistance of the U.S. Securities and Exchange Commission.
PwC China and PwC Hong Kong: Two Disciplinary Orders Imposing $7 Million in Penalties
The PCAOB sanctioned PwC China and PwC Hong Kong for violating PCAOB quality control standards related to integrity and personnel management. Both firms failed to detect or prevent extensive, improper answer sharing on tests for mandatory internal training courses. From 2018 until 2020, over 1,000 individuals from PwC Hong Kong, and hundreds of individuals from PwC China, engaged in improper answer sharing – by either providing or receiving access to answers through two unauthorized software applications – in connection with online tests for mandatory internal training courses related to the firms’ U.S. auditing curriculum. The overwhelming majority of the professionals implicated in the answer sharing performed work for the firms’ Assurance practices.
Without either firm admitting or denying the findings in the orders concerning the improper answer sharing, PwC Hong Kong was censured and agreed to pay a $4 million civil money penalty, and PwC China was censured and agreed to pay a $3 million civil money penalty. Both firms are required to review and improve their quality control policies and procedures to provide reasonable assurance that their personnel act with integrity in connection with internal training, and to report their compliance to the PCAOB within 150 days.
PCAOB enforcement staff members David Florenzo, Thomas McCann, and K. Lynn Dunston conducted the investigation. William Ryan and John Abell supervised these two matters.
Shandong Haoxin and Four Individuals: $940,000 in Penalties, Immediate Practice Limitations, and an Independent Monitor to Improve Practices and Ensure Compliance; Bars of Individuals
The PCAOB sanctioned Haoxin and four of its associated persons, LIU Kun (“Liu”), MA Yao (“Ma”), SUN Penghuan (“Sun”), and ZHU Dawei (“Zhu”), for violations of the U.S. securities laws and PCAOB rules and standards in connection with the audits of the 2015-2017 financial statements of Gridsum Holding Inc. (“Gridsum”).
Among other things, the PCAOB found that:
Haoxin violated the U.S. securities laws by issuing an audit report falsely stating that the firm’s audits of the 2015-2017 financial statements of Gridsum had been performed in accordance with PCAOB standards and that Haoxin was independent of Gridsum, when Haoxin knew, or was reckless in not knowing, that its audits did not comply with PCAOB standards and that it was not independent of Gridsum.
Liu, the engagement partner for the Gridsum audits, and Ma, the engagement quality reviewer, recklessly contributed to the firm’s violations of the U.S. securities laws and PCAOB rules and standards.
Haoxin, Liu, Ma, Sun, and Zhu violated independence requirements and/or PCAOB auditing, ethics, and/or quality control rules and standards. Among other violations, Haoxin and the engagement team improperly relied on a predecessor auditor’s draft work papers, adopted those draft work papers as their own, and performed limited additional procedures before issuing an unqualified audit opinion on Gridsum’s 2015-2017 financial statements. In addition, Haoxin, Liu, and Ma violated relevant independence requirements by informing Gridsum that they expected to issue an unqualified opinion before Gridsum had actually engaged Haoxin as its external auditor.
Haoxin and Zhu failed to cooperate with the investigation conducted by the PCAOB Division of Enforcement and Investigations by providing false information.
Without admitting or denying the Board’s findings, Haoxin and the individual respondents settled with the PCAOB and consented to the disciplinary order.
Haoxin was censured and agreed to pay a civil money penalty of $750,000 and to accept immediate practice limitations, including prohibitions on accepting new PCAOB audit clients and a requirement for pre-issuance reviews.
Haoxin also agreed to remedial undertakings, including to retain (at the firm’s expense) an independent monitor who will review and advise the firm on its policies and procedures, ensure the firm complies with the requirements of the order, and report back to the PCAOB. Additional agreed undertakings include requirements for further training for staff involved in PCAOB audits and a review and modification or supplementation of the firm’s quality control policies and procedures. The order bars Liu, Ma, Sun, and Zhu from being associated persons of a registered public accounting firm. Liu, Ma, and Sun may file petitions for Board consent to associate with a registered public accounting firm after the expiration of four years, two years, and one year, respectively from the date of the order. The order limits Ma’s activities for an additional one year if the Board later consents to her association with a registered firm.
Liu, Ma, Sun, and Zhu agreed to pay civil money penalties of $100,000, $50,000, $20,000, and $20,000, respectively, and were censured. Liu, Ma, and Sun also agreed to complete 50 hours of additional continuing professional education. In consideration of their financial resources, the civil monetary penalties for Ma and Zhu were lowered from $75,000 and $120,000, respectively.
PCAOB enforcement staff members Melissa R. Handrigan, R. Davis Taylor, Tony Chen, Sherry Tao, Michael Rosenberg, and Kristina Shin conducted the investigation. William Ryan and John Abell supervised this matter.
The PCAOB oversees auditors’ compliance with the Sarbanes-Oxley Act, provisions of the securities laws relating to auditing, professional standards, and PCAOB and SEC rules.
Further information about the PCAOB Division of Enforcement and Investigations is available on the PCAOB website. Firms or individuals wishing to report suspected misconduct by auditors, or to self-report possible misconduct, may visit the PCAOB Tips and Referrals page.
About the PCAOB
The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers registered with the Securities and Exchange Commission, including compliance reports filed pursuant to federal securities laws.
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