US regulator in final talks with PwC, KPMG over audits of mainland firms facing delisting, with report due soon: sources

A landmark review of audits of companies facing US delisting is coming to an end, with a report expected as soon as year’s end, sources say
The Public Company Accounting Oversight Board is reviewing whether audits by PwC and KPMG can meet the demands of US regulators

Accounting and auditing

Enoch Yiu

Published: 8:30am, 13 Dec 2022

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A team of US regulators is in the final stages of discussions with two Hong Kong accounting firms regarding their audits of mainland Chinese companies facing possible delisting from US exchanges, according to two sources familiar with the situation.

This indicates the unprecedented review is nearing its end, and a report may come as soon as the end of this year, potentially deciding the fate of about 168 US-listed mainland firms.

Two teams of inspectors from the Public Company Accounting Oversight Board (PCAOB) spent about seven weeks at the Hong Kong offices of PwC and KPMG between mid September and early November. They went through hundreds of audit working papers and interviewed the firms’ accountants regarding their audits of the mainland companies.

The review marks the first time in history that the China Securities Regulatory Commission (CSRC) has allowed auditors to take audit records outside the mainland for PCAOB inspection.

A view of the China Securities Regulatory Commission (CSRC) office building located at Beijing’s Financial Street in downtown Beijing on December 18, 2019. The review taking place in Hong Kong represents the first time the CSRC has allowed audit records to be taken outside the mainland for inspection. Photo: Simon Song

After the on-site review wrapped up, the inspectors returned to the US. Recently, the team sent questions to the two accounting firms to discuss certain audit procedures and information, according to two separate sources familiar with the situation.

The two firms are now preparing responses for the US regulator in a procedure that is normal for the PCAOB, said the two sources, who added that the whole inspection process has gone smoothly.

According to the PCAOB website, if the inspection team identifies a potential deficiency, it discusses the matter with the accounting firm and may review additional audit documentation or issue a comment form about its concerns. The audit firm being inspected is allowed the opportunity to provide a written response to the comment form.

What are the US audit regulator’s inspectors doing in Hong Kong?

“After the firm’s response to the comment form, the PCAOB evaluates the matter for inclusion in the inspection report,” the PCAOB said, adding that audit firms may take additional audit procedures to address the issue identified by the inspectors. “An inspection may include a review, on a sample basis, of the adequacy of a firm’s remedial actions, either with respect to previously identified deficiencies or deficiencies identified during that inspection.”

Such communication is the final step of the review process before a report is issued, according to the PCAOB. The PCAOB previously said it aimed to have a report by the end of this year on whether the review can fulfil the demands of the US inspectors.

The PCAOB, KPMG and PwC did not comment.

An example of a working paper used in the auditing review conducted by the Public Companies Accounting Oversight Board (PCAOB), in their work to resolve the auditing spat with China, in Hong Kong. Photo: Handout

Some 168 Chinese firms listed in the US, with a combined market value of US$1.5 trillion as of June, were audited by 15 Hong Kong and mainland accounting firms registered with the PCAOB, according to the audit regulator.

These companies face delisting from US exchanges under the United States’ Holding Foreign Companies Accountable Act if they do not allow the PCAOB to review their audit records for three consecutive years. Last December, the PCAOB said Hong Kong and China were the two areas that did not meet the requirements, as it could not review audit papers of Chinese companies audited by mainland and Hong Kong-based accounting firms.

China’s release of audit papers for the process followed an agreement signed by the Ministry of Finance, the CSRC and the PCAOB in late August.

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Mainland regulators have been glad to see that the US regulators are only focused on checking whether the auditors have fulfilled their duties, the Post’s sources said.

“The mainland regulators had concerns that the overseas regulators would try to see sensitive information during the inspection, but the review process has proven the US regulator has its eye on audit quality only,” a source familiar with the mainland regulators said. “This may pave the way for mainland China to consider allowing the US inspectors to do the audit inspection next year.”

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