The US watchdog says it has found unacceptable problems with Chinese company audits

WASHINGTON, May 10 (Reuters) – A U.S. accounting watchdog found unacceptable deficiencies in audits of dozens of U.S.-listed Chinese companies by KPMG in China and PricewaterhouseCoopers in Hong Kong, authorities said on Wednesday.

The US Public Company Accounting Oversight Board (PCAOB) published the findings of its inspections after gaining access to Chinese company auditors for the first time last year after more than a decade of negotiations with Chinese authorities. This access prevented approximately 200 China-based public companies from potentially being kicked off US exchanges.

The deficiencies were so great that auditors were unable to obtain enough evidence to substantiate the companies’ accounts, PCAOB Chairwoman Erica Williams told reporters Wednesday. The firms, two of the so-called “Big Four” in accounting, represent 40% of the market share of US-listed companies audited by firms in Hong Kong and mainland China, she said.

PricewaterhouseCoopers (PwC) in Hong Kong said it is working with the PCAOB to resolve issues raised and noted that the inspection report marks an important milestone for US-Chinese cooperation. KPMG’s China firm said in a statement that it has taken steps to address the issues the PCAOB had found.

While the findings are consistent with what the agency typically finds when it first accesses a foreign country’s audit documents, they are likely to raise concerns among global investors about the accuracy of U.S.-listed Chinese companies’ public accounts.

“The fact that we found so many deficiencies is really a sign that the inspection process worked, and now we can get to work holding firms accountable and driving audit quality,” Williams said.

The PCAOB will give the two firms a year to correct quality control deficiencies, and the agency will make referrals to the agency’s enforcement team where appropriate, Williams said. Such investigations can ultimately lead to monetary penalties or prevent audit firms from performing work for US publicly traded companies.

PCAOB officials have already begun fieldwork for 2023 inspections. With its work in 2023, the PCAOB expects that it will have inspected auditors representing 99% of the work in the region.

The agency will continue to require full access to do its work, Williams said. If Chinese authorities begin restricting access for inspections and investigations, a US law passed last year sets a two-year clock for compliance or expulsion from US exchanges.

Reporting by Michelle Price and Chris Prentice

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