- The Public Company Accounting Oversight Board (PCAOB) today announced three settled disciplinary orders sanctioning three China-based firms and four individuals for violations of the U.S. securities laws and PCAOB rules and standards.
- These are the first enforcement settlements with mainland Chinese and Hong Kong firms since the PCAOB secured historic access to inspect and investigate firms headquartered in China and Hong Kong in 2022.
- The sanctions include the highest civil money penalty the Board has imposed against a China-based firm and one of the highest penalties the Board has imposed against any firm.
- The sanctions also include a requirement – for the first time ever in a Board disciplinary order – that a China-based firm retain an independent monitor.
- Two disciplinary orders imposing a total of $7 million in penalties against two registered public accounting firms within the PwC global network, Shanghai-based PricewaterhouseCoopers Zhong Tian, LLP(PDF) (“PwC China”) and Hong Kong-based PricewaterhouseCoopers (“PwC Hong Kong”)(PDF), for violating PCAOB quality control standards related to integrity and personnel management.
- A disciplinary order imposing immediate practice limitations (including prohibitions on accepting new PCAOB audit clients), an independent monitor to improve practices and ensure compliance, $940,000 in fines, and bars against individuals at Shandong Haoxin Certified Public Accountants Co., Ltd. (“Haoxin”)(PDF), a mainland China-based registered public accounting firm, and four of its associated persons for violations that include issuing a false audit report, failing to maintain independence from their issuer client, and improperly adopting the work of another accounting firm as their own.
“The Board’s groundbreaking sanctions on these two PwC affiliates and Haoxin demonstrate the global reach of the PCAOB’s inspection and enforcement programs and its commitment to rooting out misconduct, wherever it occurs,” “These matters should send the message to all registered firms and their associated persons, wherever located, that the PCAOB will continue to be rigorous in its approach to enforcement matters and will employ all sanctions at its disposal to deter misconduct and improve audit quality.” -Robert E. Rice, PCAOB Director of Enforcement and Investigations
PwC China and PwC Hong Kong:
- The PCAOB sanctioned PwC China(PDF) and PwC Hong Kong(PDF) for violating PCAOB quality control standards related to integrity and personnel management.
- Both firms failed 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 – in connection with online tests for mandatory internal training courses related to the firms’ U.S. auditing curriculum.
- The overwhelming majority of the professionals implicated in the answer sharing performed work for the firms’ Assurance practices.
- Without either firm admitting or denying the findings in the orders concerning the improper answer sharing, PwC Hong Kong was censured and agreed to pay a $4 million civil money penalty, and PwC China was censured and agreed to pay a $3 million civil money penalty.
- Both firms are required to review and improve their quality control policies and procedures to provide reasonable assurance that their personnel act with integrity in connection with internal training, and to report their compliance to the PCAOB within 150 days.
Shandong Haoxin and Four Individuals:
- Firm: $750,000
- Individuals: $190,000
- PCAOB sanctioned Haoxin and four of its associated persons(PDF), LIU Kun (“Liu”), MA Yao (“Ma”), SUN Penghuan (“Sun”), and ZHU Dawei (“Zhu”), for violations of the U.S. securities laws and PCAOB rules and standards in connection with the audits of the 2015-2017 financial statements of Gridsum Holding Inc. (“Gridsum”).
- Among other things, the PCAOB found that:
- Haoxin violated the U.S. securities laws by issuing an audit report falsely stating that the firm’s audits of the 2015-2017 financial statements of Gridsum had been performed in accordance with PCAOB standards and that Haoxin was independent of Gridsum, when Haoxin knew, or was reckless in not knowing, that its audits did not comply with PCAOB standards and that it was not independent of Gridsum.
Without admitting or denying the Board’s findings, Haoxin and the individual respondents settled with the PCAOB and consented to the disciplinary order.
- Haoxin was censured and agreed to pay a civil money penalty of $750,000 and to accept immediate practice limitations, including prohibitions on accepting new PCAOB audit clients and a requirement for pre-issuance reviews.
- Haoxin also agreed to remedial undertakings, including to retain (at the firm’s expense) an independent monitor who will review and advise the firm on its policies and procedures, ensure the firm complies with the requirements of the order, and report back to the PCAOB.
- Additional agreed undertakings include requirements for further training for staff involved in PCAOB audits and a review and modification or supplementation of the firm’s quality control policies and procedures.
- The order bars Liu, Ma, Sun, and Zhu from being associated persons of a registered public accounting firm.
- Liu, Ma, and Sun may file petitions for Board consent to associate with a registered public accounting firm after the expiration of four years, two years, and one year, respectively from the date of the order.
- The order limits Ma’s activities for an additional one year if the Board later consents to her association with a registered firm.
- Liu, Ma, Sun, and Zhu agreed to pay civil money penalties of $100,000, $50,000, $20,000, and $20,000, respectively, and were censured.
- Liu, Ma, and Sun also agreed to complete 50 hours of additional continuing professional education.
- In consideration of their financial resources, the civil monetary penalties for Ma and Zhu were lowered from $75,000 and $120,000, respectively.
- Liu, the engagement partner for the Gridsum audits, and Ma, the engagement quality reviewer, recklessly contributed to the firm’s violations of the U.S. securities laws and PCAOB rules and standards.
- Haoxin, Liu, Ma, Sun, and Zhu violated independence requirements and/or PCAOB auditing, ethics, and/or quality control rules and standards.
- Among other violations, Haoxin and the engagement team improperly relied on a predecessor auditor’s draft work papers, adopted those draft work papers as their own, and performed limited additional procedures before issuing an unqualified audit opinion on Gridsum’s 2015-2017 financial statements.
- In addition, Haoxin, Liu, and Ma violated relevant independence requirements by informing Gridsum that they expected to issue an unqualified opinion before Gridsum had actually engaged Haoxin as its external auditor.
- Haoxin and Zhu failed to cooperate with the investigation conducted by the PCAOB Division of Enforcement and Investigations by providing false information.
Today, the Public Company Accounting Oversight Board (PCAOB) announced settlements with three PCAOB-registered public accounting firms based in China and Hong Kong. The PCAOB’s ability to investigate in these matters is consistent with its prior determination that it can inspect and investigate completely issuer audit engagements in China and Hong Kong.
Further, I am pleased that, once again this year, the PCAOB has been able to fulfill its oversight responsibilities as it relates to audit firms in China and Hong Kong, facilitated by last year’s signing of the Statement of Protocol in August 2022 by the PCAOB, the China Securities Regulatory Commission, and China’s Ministry of Finance, and enabled by the Holding Foreign Companies Accountable Act. My sincere hope is that the Chinese authorities will continue to work cooperatively with the PCAOB such that the PCAOB will continue to be able to inspect and investigate completely issuer audit engagements in China and Hong Kong. American investors are better protected when the PCAOB can audit the auditors of issuers listed in the United States.
- The Public Company Accounting Oversight Board (PCAOB) sanctioned three China-based firms and four individuals for violating U.S. securities laws and PCAOB rules, marking the first enforcement settlements with mainland Chinese and Hong Kong firms since gaining inspection and investigation access in 2022.
- Two PwC network firms, PwC China ($3 million) and PwC Hong Kong ($4 million, largest fine to a China-based firm ever), were penalized a total of $7 million for failing to prevent widespread improper answer sharing on tests related to U.S. auditing courses.
- Over 1,000 professionals from PwC Hong Kong and hundreds from PwC China were involved in this misconduct from 2018 to 2020.
- Both PwC firms, without admitting or denying the findings, were censured and agreed to pay civil penalties ($4 million for PwC Hong Kong and $3 million for PwC China) and are required to improve their quality control policies and report compliance to the PCAOB.
- Shandong Haoxin CPA Co., Ltd. and four associated individuals were penalized for issuing a false audit report and failing to maintain independence in their audits of Gridsum Holding Inc.
- They also improperly adopted another auditor's work and were involved in numerous other violations.
- Haoxin agreed to a $750,000 penalty and immediate practice limitations, including a prohibition on accepting new PCAOB audit clients and a requirement to retain an independent monitor.
- The four individuals were barred from association with registered public accounting firms, with varying conditions for future reassociation and additional financial penalties.
- Gary Gensler supports this action.
- I wonder if any of these funky audits were used as a basis for collateral against GME?