PCAOB Sanctions Hong Kong Audit Firm, its New York Affiliate, and Four Individuals
The Public Company Accounting Oversight Board today announced sanctions in settled disciplinary orders against a Hong Kong audit firm, its New York affiliate, and four individuals for violations of PCAOB rules and standards arising from audits of a NASDAQ-listed company located in the People's Republic of China.
AWC (CPA) Limited, a Hong Kong audit firm, and its managing director and director of audit were sanctioned for improperly relying on management representations, ignoring red flags indicating possible fraud, impaired independence, and other violations. AWC LLP, an affiliated firm in New York, and its two partners were sanctioned for quality control, impaired independence, and other violations.
"Investors are relying on PCAOB-registered audit firms, including foreign-based firms, to perform their audit responsibilities as gatekeepers to our capital markets," said James R. Doty, PCAOB Chairman. "The Board's disciplinary action demonstrates that these firms and their personnel are accountable under U.S. law for their significant failures."
The settled disciplinary orders sanctioning both the firms and individuals included the following:
- AWC (CPA) Limited—Censured and revoked firm's PCAOB registration with a right to reapply after two years, and a $10,000 civil money penalty.
- "Albert" WONG Chi Wai—Censured and barred from being an associated person with a right to request terminating the bar after two years, and a $10,000 civil money penalty.
- "Martin" WONG Fei Cheung—Censured and barred from being an associated person with a right to request terminating the bar after one year and a $5,000 civil money penalty.
- AWC LLP—Censured and suspended firm's PCAOB registration for one year.
- Mun Leung "Clive" CHUNG—Censured and barred from being an associated person with a right to request terminating the bar after two years, and a $5,000 civil money penalty.
- Lam Shan MUI—Censured and limitation placed on activities that he can perform in connection with public company audits for one year, and requirement to complete additional professional education related to ethics and independence requirements.
Both firms and all individuals consented to the respective orders without admitting or denying the Board's findings.
According to the order, AWC (CPA) Limited issued unqualified audit opinions on the financial statements of a NASDAQ-listed company for year-end 2010, 2011, and 2012 filings, despite numerous audit deficiencies. AWC improperly relied on management representations in auditing cash and revenue and ignored numerous red flags indicating potential fraud and undisclosed related-party transactions.
When AWC learned during the 2010 audit that the chairman and an employee of the audited company held significant amounts of the company's cash in their personal bank accounts, the engagement team failed to consider whether these transactions may have been executed to engage in or conceal fraud.
During the 2010 audit, AWC also failed to assess the risk of fraud when management made a last minute adjustment to a material amount of revenue after AWC had inquired whether the sales were to a potentially related party. The company's SEC filing reflected this adjustment. Shortly thereafter, the company disclosed that the sales were to a business owned by the son of the audited company's chairman.
AWC LLP, an entity associated with AWC (CPA) Limited, and its partners also violated PCAOB rules and U.S. securities laws in connection with the company's audits by performing prohibited nonaudit services and assuming engagement team responsibilities while serving as engagement quality reviewer for the audits.
"The serious audit failures noted in these orders demonstrate the importance of the PCAOB scrutinizing public company audits, regardless of where in the world the audits occur, for the protection of investors," said Claudius B. Modesti, PCAOB Director of Enforcement and Investigations.
The orders also found fault with both firms' systems of quality control. The two firms failed to have appropriate quality control policies and procedures for auditor independence and compliance with professional and documentation standards.
The PCAOB appreciates the assistance of the Division of Enforcement of the U.S. Securities and Exchange Commission, particularly the Denver Regional Office. PCAOB Enforcement staff members Alan Lo Re, R. Davis Taylor, Maryann Wong, Tony Chen, and Thomas Barry conducted the investigation supervised by Kyra Armstrong and Marion Koenigs.