Audits carried out by the Chinese arms of KPMG and PwC contained an “unacceptable” number of flaws, US inspectors said on Wednesday, as they vowed to expand examinations of large accounting firms in the country.
The Public Company Accounting Oversight Board found multiple deficiencies in all four of the audits it examined by KPMG Huazhen, the Big Four firm’s mainland China operation, it said.
There were also multiple deficiencies in three of four audits inspected at PwC’s Hong Kong operation, and the PCAOB found two cases where PwC staff had financial relationships with the company it was auditing.
The two firms were the first to be examined by US regulators under an agreement with China late last year. The PCAOB was created to oversee auditors of US-listed companies, wherever they are in the world, but inspectors were blocked by Beijing until Washington threatened to delist Chinese companies from US stock exchanges.
“Both reports show unacceptable rates of deficiencies,” said Erica Williams, PCAOB chair. “The fact that we found so many deficiencies is a sign that the inspection process worked, and now we can go about the work of holding firms accountable and driving audit quality.”
PCAOB inspection reports do not name the companies whose audits came under scrutiny, but Williams said the agency had picked state-owned enterprises and companies in “sensitive” industries.
KPMG Huazhen and PwC together audit about 40 per cent of US-listed Chinese stocks by market capitalisation, Williams said, and a new round of inspections this year will target audit firms that cover almost all of the remaining 60 per cent.
“We will be inspecting more firms and more engagements and we’re going to take advantage of the full year.”
Deficiencies identified by inspectors at PwC and KPMG Huazhen included failures to understand a company’s IT systems, poor procedures for checking a group’s revenue and incomplete documentation.
However, Williams said it was not unexpected to find a high level of deficiencies in jurisdictions that are being inspected for the first time, and audit firms can be expected to improve over time. The PCAOB found deficiencies in one in three audits it examined last year.
“Although a number of issues are raised by the PCAOB, the report also states that with respect to the audits inspected, none were found to have an incorrect opinion on financial statements,” PwC Hong Kong said. “We are working with the PCAOB to address the issues raised . . . and we continue to invest significantly to enhance our audit quality.”
KPMG Huazhen said it had addressed the issues raised and was investing in technology and training.
Chinese regulators have also been working to improve the quality of audits in the country, at the same time as addressing concerns about sensitive information leaking out of the country via foreign audit firms. The finance ministry in March shut down Deloitte’s Beijing operation for three months for “serious deficiencies” in an audit of bad-debt manager China Huarong Asset Management.
The Big Four global accounting firms have spent decades expanding their business in China, but their market-leading position has come under threat as a result of the actions.
Beijing has also curtailed foreign access to databases with Chinese corporate information. Consultancies and due diligence firms Bain & Company, Mintz and Capvision have had their offices raided in recent months.