Accounting

PCAOB sanctions three Chinese firms, including PwC affiliates

The Public Company Accounting Oversight Board levied penalties against three firms in China, including member firms of PricewaterhouseCoopers that it found were improperly sharing answers to exams after PCAOB inspectors gained full access to the firms.

The sanctions come after years of effort by the PCAOB to get access to inspect firms in mainland China and Hong Kong. After Congress passed the Holding Foreign Companies Accountable Act in 2020, the Securities and Exchange Commission began threatening to delist companies whose auditing firms could not be inspected by the PCAOB, and Chinese authorities finally began giving the PCAOB access to inspect Chinese firms last year, although they initially could only inspect two auditing firms affiliated with the Big Four, and only by traveling to Hong Kong and inspecting the audit workpapers there.

Now, according to the PCAOB’s chair, Erica Williams, Chinese authorities are allowing complete access, and that allowed them to uncover the problems at PwC China and PwC Hong Kong, as well as the other sanctioned firm, Shandong Haoxin CPAs Co. Ltd. 

“The PCAOB is conducting inspections and investigative work of firms in mainland China and Hong Kong,” Williams said during a press conference Thursday in answer to a question from Accounting Today. “The Chinese authorities have been providing us with the complete access that we need and that is required under the Holding Foreign Companies Accountable Act and they have not been interfering with any of our investigations or our inspections.”

PCAOB chair Erica Williams

The PCAOB is imposing $7.9 million in total fines against the three firms, and Williams noted that the sanctions represent the highest civil money penalties the board has ever imposed against firms in mainland China and Hong Kong, as well as some of the highest penalties it has imposed against any firm around the globe, and that this is the first time ever that the board has been able to bring enforcement action against a mainland Chinese firm based on its audit deficiencies.

“The days of China-based firms evading accountability are over,” said Williams. “The PCAOB is demonstrating that we will take action to protect investors in U.S. markets and impose tough sanctions against anyone who violates PCAOB rules and standards, no matter where they are located.”

The first two orders include $4 million in penalties against PwC Hong Kong, which was inspected last year, and $3 million against PwC China, for a total of $7 million.

“Before today, the highest penalty imposed against a China-based firm was $50,000,” said Williams. “Today’s $4 million fine matches the second-highest penalty amount for any firm in PCAOB history, and $3 million matches the third highest amount.”

She noted that the two PwC global network firms, Shanghai-based PricewaterhouseCoopers Zhong Tian, LLP (PwC China) and Hong Kong-based PricewaterhouseCoopers (PwC Hong Kong),  violated the integrity and personnel management elements of the board’s quality control standards by failing 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, according to the PCAOB.

In addition to financial penalties, both firms are now required to take steps to prevent similar violations from happening again and to report their compliance to the PCAOB.

PwC said it self-reported the problems to the PCAOB inspectors.

“We are committed to serving our clients and other stakeholders with distinction,” said a statement from PwC Hong Kong/Zhong Tian emailed to Accounting Today. “When we do not fully meet the high standards we set for ourselves, we take action to learn lessons and commit to do better in the future. It is highly regrettable that a number of employees engaged in the improper sharing and use of technology aimed at assisting with internal trainings and assessments. After becoming aware of these issues, the firms investigated these matters promptly and took remedial action. This included blocking any further use of or dissemination of the technologies concerned and directing the retake of courses where applicable. We have since emphasized to all of our people our policies regarding appropriate conduct during online training courses, along with highlighting the significance of ethical and responsible use of emerging technology. We self-reported this matter to the PCAOB and have now reached a settlement. We are pleased that as part of that settlement the PCAOB has credited us with extraordinary cooperation in this matter.”

The PCAOB disputes the contention that PwC self-reported the problems, saying in its enforcement order, “The Firm also took years to report to PwC Global the nature of the two answer sharing applications and that more than one thousand personnel downloaded the applications. In fact, it was not until September 2022, when the PCAOB conducted its first inspection of the Firm in Hong Kong and asked the Firm to identify any instances of improper answer sharing by its personnel, that the Firm finally told the PCAOB and PwC Global about these details.”

The third order from the PCAOB levies $940,000 in fines against mainland-China based firm Shandong Haoxin and four of its auditors for falsifying an audit report, failing to maintain independence from their issuer client, and improperly adopting the work of another accounting firm as their own.

In early 2019, the firm violated the anti-fraud provisions of U.S. securities laws and independence rules in the audits of a China-based data analysis software company, Gridsum Holding, Inc., according to the PCAOB. 

“Before even being engaged as Gridsum’s external auditor, the firm told the company that it was prepared to issue a clean audit opinion on three years’ worth of financial statements,” said Williams. “Having received that commitment, Gridsum promptly dismissed its then-current auditor and hired Haoxin. A day later, relying primarily on the prior auditor’s draft work papers and performing little work of its own, Haoxin issued its clean audit opinion. This egregious audit failure is unacceptable.”

To protect investors, the PCAOB’s order prohibits Shandong Haoxin from accepting new clients and bars four of its auditors from participating in U.S. issuer and registered broker-dealer audits. The order also requires the firm to retain an independent monitor at its own expense to improve practices and ensure compliance. That’s a first for any China-based firm and only the second time the PCAOB has required any firm that’s not part of a global network to hire an independent monitor.

“Together, these strong enforcement orders show the PCAOB will use every tool we have to hold China-based firms accountable and protect investors by deterring wrongdoing,” said Williams.

She noted that the two PwC cases are a direct result of information learned in the inspections conducted by the PCAOB last year, and investigators never would have been able to take the witness testimony required or obtain the documents necessary to bring a successful case against Shandong Haoxin without complete access to the firm.

The PCAOB inspections team has completed its fieldwork for 2023 and received the complete access required under the HFCAA and is already making plans to begin its 2024 inspections early next year.

The firms that were inspected in 2022 and 2023 audited 99% of the total market cap of U.S.-listed companies audited by Hong Kong and mainland China firms, and the PCAOB is on track to inspect firms that audited 100% of the total market cap by the end of 2024, according to Williams. Under the current schedule, the teams will complete a full three-year cycle of inspections in only 27 months.

“Our inspectors and investigators are tough,” said Williams. “They are thorough, and they demand the complete access the HFCAA requires without loopholes or exceptions. We review that access constantly. And as I have said many times, should authorities in the People’s Republic of China obstruct the PCAOB’s access — in any way and at any point — the board will act immediately to consider the need to issue a new determination. As long as our access remains complete, we will utilize it to the fullest in service of investors — because just like everything we do at the PCAOB, protecting investors in U.S. markets is what our work in China is all about.”