Public Company Accounting Oversight Board (PCAOB) chair, Erica Williams made the following statement after the PCAOB sanctioned three China-based firms and four individuals for violations of the U.S. securities laws and PCAOB rules and standards.
Williams said: “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 and investigate registered public accounting firms in China for the first time in history.
“We are announcing three enforcement orders against China-based firms, totaling $7.9 million in fines.
“These sanctions represent the highest civil money penalties the Board has ever imposed against firms in mainland China and Hong Kong, some of the highest penalties the Board has imposed against any firm around the globe, and the first time ever that the PCAOB 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. 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 we inspected last year, and $3 million against PwC China, for a total of $7 million.
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By GlobalData“Before today, the highest penalty imposed against a China-based firm was $50,000. 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.
“The two PwC global network firms violated the integrity and personnel management elements of the PCAOB 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 unauthorised software applications.
“In addition to the financial penalties, both firms are required to take steps to prevent such violations from happening again and to report their compliance to the PCAOB so we can ensure investors are better protected.
“The third order imposes $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.
“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.
“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 on U.S. markets, the order prohibits the firm 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—a first for any China-based firm and only the second time the PCAOB has required any firm that is not part of a global network to retain 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.
“I want to thank our incredible PCAOB investigators, especially those who traveled to Hong Kong to take testimony last year. Building these cases is not easy and their commitment to protecting investors is remarkable.
“I also want to thank the SEC.
“Of course, these enforcement orders are only possible because of the Holding Foreign Companies Accountable Act and the leverage Congress created for the PCAOB to secure complete access in China.
“The two PwC cases are a direct result of information learned in the inspections we conducted last year. And our 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.
“Investors are more protected today because of Congress’ leadership, and I want to thank Members of the House and the Senate for their ongoing work to hold China accountable and their ongoing support of the PCAOB’s efforts in China.
“Of course, we are just getting started.
“Our inspections team has completed fieldwork for 2023, with the complete access required under the HFCAA. And they are already making plans to begin our 2024 inspections early next year.
“Together, the firms we 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 we are on track to inspect firms that audited 100% of the total market cap by the end of 2024.
“Under our current schedule, our teams will complete a full three-year cycle of inspections in just 27 months.
“Separately, our enforcement team will continue to take action to protect investors.
“Our inspectors and investigators are tough. 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 utilise 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.”
