US inspectors arrive in PwC, KPMG offices in Hong Kong to review Chinese companies’ audit records, sources say

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Teams of inspectors arrived this morning at the Central offices of PwC and KPMG to start reviewing the audit records of US-listed, China-based companies
The PCAOB has high standards and will perform a ‘very detailed’ inspection, which will take ‘as long as needed’, former SFC chairman says
The Hong Kong island skyline, showing the Central business district, pictured on June 6, 2022. Photo: EPA-EFE

The Hong Kong island skyline, showing the Central business district, pictured on June 6, 2022. Photo: EPA-EFE

Teams of US audit inspectors arrived at the Central offices of accounting firms PwC and KPMG this morning to begin a historic review of the audit records of US-listed, China-based companies, two sources told the South China Morning Post.

The inspectors from the Public Company Accounting Oversight Board (PCAOB) arrived in Central on Monday morning to work at the Hong Kong offices of PwC in the Prince’s Building and Edinburgh Tower as well as KPMG’s office in the Prince’s Building, the sources said.

Both accounting firms have reserved rooms for the inspectors to perform their review. The two firms have also already prepared the paper and electronic audit materials of the selected clients named by the PCAOB.

All eyes will be on the inspection result, as the inspectors’ verdicts could determine the fate of more than 160 Chinese companies that face potential delisting from US exchanges.

Carlson Tong Ka-shing, former chairman of the Securities and Futures Commission and former China chairman of KPMG, pictured on October 12, 2018. Tong said the PCAOB’s audit review will be very detailed. Photo: SCMP / Jonathan Wong

Carlson Tong Ka-shing, former chairman of the Securities and Futures Commission and former China chairman of KPMG, pictured on October 12, 2018. Tong said the PCAOB’s audit review will be very detailed. Photo: SCMP / Jonathan Wong

PwC Hong Kong and KPMG China are the first accounting firms whose audit work for American-listed mainland Chinese companies is being inspected by the US regulator. The two Big Four accounting firms last week received notice of inspections pertaining to several of their audit clients, the Post reported.

China’s Securities Regulatory Commission signed an agreement with PCAOB last month, paving the way for Beijing to allow accounting firms to bring audit records from the mainland to Hong Kong for the PCAOB inspectors to review, addressing the US audit regulator’s complaint about being unable to check audit quality.

“The PCAOB inspection in Hong Kong is important as it will be the first time ever where the PCAOB inspectors will be given access to the audit working papers of some of the major Chinese enterprises listed in the US, ” said Carlson Tong Ka-shing, former chairman of Securities and Futures Commission, who is also former China chairman of KPMG.

 

“Based on my past experience of inspections by the PCAOB of non-mainland companies, their standards are very high and their inspection very detailed, which will take as long as needed. It will be a tough challenge to the audit firms, especially as I guess the PCAOB will select the most important companies for inspection.”

Tong said PCAOB past practice has been to publish some of the findings of its inspections. Analysts are not sure if the same will be true in this case, because of China’s sensitivity.

The US inspectors opted for coming to Hong Kong instead of the mainland offices of the accounting firms because of the less restrictive quarantine rules for travellers, a source said. Hong Kong requires a three-day hotel quarantine stay, while mainland China requires 10 days.

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This marks the first time in history that the China Securities Regulatory Commission (CSRC) has allowed auditors to bring audit records outside the mainland for PCAOB inspection. The regulator, however, has redacted sensitive details such as addresses, names of factories and personal information, which should not affect the inspectors’ ability to check the audit quality, the sources said.

The accounting firms need to follow CSRC requirements while also making sure all the audit records have been archived according to PCAOB standards, the sources said.

The PCAOB inspectors can request to review any audit records, as well as ask to interview the auditors or other officers at the accounting firms to check whether they have done enough to ensure quality, the sources said.

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The two other Big Four accounting firms, Deloitte and EY, have not yet received notice from the PCAOB, sources at the two firms told the Post.

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 Holding Foreign Companies Accountable Act if they do not allow the PCAOB to review their audit records for three consecutive years.

Big Four accounting firms audit more than 130 of the 168 US-listed mainland firms, representing more than 78 per cent of the total, according to data from the PCAOB.

The PCAOB, PwC, KPMG, Deloitte and EY did not provide comments in response to a Post inquiry.

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