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US Regulator Fines Chinese Auditors $7.9M

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 7 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 7 minute read

A year after the US Public Company Accounting Oversight Board (PCAOB) was able to inspect Chinese and Hong Kong audit firms for the first time, the board imposed a $7-million combined fine against PricewaterhouseCoopers Zhong Tian, LLP in Shanghai and PricewaterhouseCoopers in Hong Kong for cheating by personnel on mandatory internal training courses related to US auditing curriculum.

The board fined PwC Hong Kong $4 million, stating that from 2018 to 2020, over 1,000 individuals shared answers by either providing or receiving access to answers through two unauthorized software applications.

PwC China was fined $3 million, and hundreds of individuals were involved in the cheating scheme.

At the same time, the US audit regulatory board sanctioned Shandong Haoxin Certified Public Accountants Co., Ltd. (Haoxin) and four associated persons for, among several egregious violations, issuing a false audit report for Gridsum Holding Inc., which provides data analysis software for companies and government agencies in China. Gridsum terminated its registration with the U.S. Securities and Exchange and Commission in April 2021.

Haoxin and the four individuals were fined $940,000 total.

The three sanctions—PwCs and Haoxin—announced on November 30, 2023, total $7.94 million. The PCAOB inspects accounting firms whose audit clients are traded on national exchanges in US and therefore regulated by the SEC.

The PCAOB said that the sanctions represent the highest penalties it has ever imposed against firms in China and Hong Kong. It is also some of the highest penalties imposed against any firm around the world.

This is the first time that the PCAOB was able to bring enforcement action against a firm in China. And this was made possible after Congress passed legislation—the Holding Foreign Companies Accountable Act—which threatened a trading ban on the Chinese audit clients that trade publicly on US exchanges. The PCAOB finally signed a historic agreement to inspect these firms in August 2022. China until then blocked access, claiming that inspections would infringe on its sovereignty, and audit workpapers may contain state secret. But the threat of trading ban finally prompted the Chinese government and the Communist Party to open up to US inspections.

Thus, the PCAOB was able to for the first time inspect the firms in the fall last year. And in May, the board issued findings on two firms, which showed high deficiency rates.

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

In a statement, SEC Chair Gary Gensler said he sincerely hopes “that the Chinese authorities will continue to work cooperatively with the PCAOB … American investors are better protected when the PCAOB can audit the auditors of issuers listed in the United States.”

PwC China and Hong Kong

In sanctioning the two PwC affiliates, the PCAOB said that they violated board quality control standards related to integrity and personnel management. The PCAOB faulted both firms for failing to detect or prevent extensive cheating.

In addition, the PCAOB’s orders stated that from 2019 to 2020, associated personnels “used tools and took steps to improperly fast-forward through Firm trainings or to falsely record that they had completed Firm trainings.”

The overwhelming majority of the implicated personnels performed work for the firms’ assurance practice.

Both firms neither admitted nor denied the findings in the orders. The board ordered the firms to fix their quality control system and provide reasonable assurance that their personnel act with integrity. The firms must report their compliance to the PCAOB within 150 days.

In a joint statement, PwC Hong Kong and China said that they regret their employees engaged in cheating.

“After becoming aware of these issues, the Firms investigated these matters promptly and took remedial action,” they stated. “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.”

The firms noted that they self-reported the matter to the PCAOB, which credited them with “extraordinary cooperation in this matter.”

In the meantime, this is not the first time a PwC affiliate was sanctioned by the PCAOB for cheating on exams.

In February 2022, the board fined PwC Canada $750,000 for having faulty quality control standards that allowed more than 1,200 professionals to cheat on internal training courses covering auditing, accounting, and professional independence from at least 2016 until early 2020. More than 1,100 of them were from the firm’s assurance practice.

Haoxin and Four Individuals

The PCAOB fined Haoxin $750,000, and the four individuals were fined $190,000 for faulty audits of Gridsum’s 2015-2017 financial statements.

Haoxin violated numerous US securities laws and PCAOB standards, including independence rules.

“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,” Williams explained. “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.”

The four individuals are: Liu Kun who served as the engagement partner for the Gridsum audits—$100,000 penalty; Ma Yao who was the engagement quality reviewer—$50,000; Sun Penghuan who was the manager for Gridsum audits—$20,000; and Zhu Dawei who was the firm’s chief partner and legal representative—$20,000.

Considering their financial resources, the penalty amounts for Ma and Zhu were lowered from $75,000 and $120,000, respectively, the board said.

Haoxin and the four individuals settled the charges without admitting or denying the board’s findings.

The board also imposed a variety of undertakings for the firm. Among other things, Haoxin cannot accept new PCAOB audit clients for a period of time and must retain an independent monitor who will review and advise the firm on its policies and procedures to make sure that it complies with the requirements in the PCAOB order.

Liu, Ma, Sun, and Zhu were barred from being associated with registered public accounting firm. Liu, Ma, and Sun may file petitions after four years, two years, and one year, respectively. Ma’s activities will be limited for an additional one year if the board later consents to her association with a registered firm.

“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 Rice, PCAOB director of Enforcement and Investigations, said in a statement.

Haoxin did not immediately respond to a request for comment.

Accountability and Continued Tough Enforcement

In the meantime, Chair Williams said that the board’s inspections team has completed fieldwork for 2023 and are making plans to begin 2024 inspections early next year.

The firms inspected in 2022 and 2023 audited 99% of the total market cap of US-listed companies audited by auditors in China and Hong Kong, and the board is on track to inspect 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,” Williams said.

Separately, “[o]ur inspectors and investigators are tough. They are thorough, and they demand the complete access the HFCAA requires without loopholes or exceptions,” she said. “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.”


This article originally appeared in the December 1, 2023, edition of Accounting & Compliance Alert, available on Checkpoint.

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