PCAOB Releases 2022 Inspection Reports for Mainland China, Hong Kong Audit Firms

Public Company Accounting Oversight Board (PCAOB) Chair Erica Y. Williams made the following statement today after the PCAOB released inspection reports for two firms inspected in 2022: KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers in Hong Kong.

From Chair Williams:

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.

Today, 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.

Today’s 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.

Last year was only the beginning of our work to inspect and investigate firms in mainland China and Hong Kong.

Our enforcement teams continue to pursue investigations, and inspectors have begun fieldwork for 2023’s inspections. We anticipate fieldwork will continue off and on throughout most of the year, which is common practice for inspections such as these in jurisdictions around the world.

The two firms we inspected in 2022 audited 40% of the total market share of U.S.-listed companies audited by Hong Kong and mainland China firms, and we are on track to hit 99% of the total market share by the end of this year. So, there is no question that the PCAOB is prioritizing inspections that are the most relevant to investors on U.S. markets – because protecting investors is what this is all about.

Indeed, the release of today’s reports is yet another sign that investors are more protected because of Congress’ leadership in passing the HFCAA. And last year’s legislation, which shortened the timeline from three years to two years, provided important leverage as the PCAOB continues demanding complete access to inspect and investigate firms headquartered in mainland China and Hong Kong – with no loopholes and no exceptions.

As I have said before, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access – in any way and at any time – the Board will act immediately to consider the need to issue a new determination.

I want to thank the hardworking inspectors, investigators, and PCAOB staff who continue this important work on behalf of investors every day.