US accounting regulator finds ‘unacceptable rate’ of shortcomings in mainland China audits

The Public Company Accounting Oversight Board (PCAOB) said on Wednesday that it found an “unacceptable rate” of deficiencies as it carried out its first review of audits of mainland Chinese firms since striking a deal last year to give it access to mainland audit records for the first time.

The US regulator said that it found significant shortcomings in three-quarters of the audits of US-listed mainland firms conducted by PwC in Hong Kong and 100 per cent of the audits conducted by KPMG Huazhen LLP in mainland China last year. The regulator reviewed eight audits in total, or four conducted by each firm in 2022.

However, the inspection reports are not expected to affect the status of about 170 mainland China firms listed on American bourses. US officials had threatened to delist those firms in a long-running dispute over the audit inspections before an agreement was reached between the two nations last year.

“Any deficiencies are unacceptable. At the same time, it is not unexpected to find such high rates of deficiencies in jurisdictions that are being inspected for the first time,” PCAOB Chair Erica Williams said in a statement.

The shortcomings identified by its staff were “consistent” with the types previously found by the regulator in other first-time inspections globally, the PCAOB said.

“We recognise the inspection process provides a valuable opportunity to improve the quality of our audits,” Raymund Chao, PwC’s Asia-Pacific and China chairman, said in a March 20 letter responding to the PCAOB’s inspection report. “We actively use feedback from internal and external review processes in our ongoing efforts to continuously improve audit quality, and we will address the matters raised in the draft report in a thorough and thoughtful way.”