By U.S. securities regulators have recently fined three auditors based in China a total of over $7 million for various violations, including the issuance of false audit reports.
The Public Company Accounting Oversight Board (PCAOB), responsible for overseeing auditors of public companies listed on U.S. exchanges, announced the hefty fines on Thursday. The penalties were imposed on PwC China and PwC Hong Kong for their involvement in “improper answer sharing” among hundreds of employees during mandatory internal training courses. Additionally, mainland China-based firm Shandong Haoxin and four of its auditors were sanctioned for fabricating an audit report, breaching independence from their issuer client, and plagiarizing the work of another accounting firm.
These sanctions mark the largest civil money penalties ever imposed by the PCAOB on firms in mainland China and Hong Kong. Interestingly, it is also the first time the regulatory body has taken enforcement action against a mainland China auditor.
During a press conference, PCAOB Chair Erica Williams declared, “The days of China-based firms evading accountability are over.” She emphasized the commitment of the PCAOB to defend investors in U.S. markets by strictly implementing sanctions against any violators of the PCAOB rules and standards, regardless of their location.
The enforcement actions were made possible due to the enactment of the Holding Foreign Companies Accountable Act in 2020. This legislation empowered U.S. regulators to access the financial records of Chinese auditors working for U.S.-listed companies. As a result, auditor inspections became mandatory to ensure compliance with U.S. securities laws, thereby preventing potential delisting of China-based companies.
In conclusion, these recent fines reflect a firm stance by U.S. regulators against misconduct within the auditing industry, highlighting their dedication to safeguarding investors and maintaining transparency in the global financial market.
Popular China-Based Companies on U.S. Exchanges
Two well-known China-based companies, Alibaba Group Holding Ltd. (BABA) and JD.com Inc. (JD), are among the popular names listed on U.S. exchanges. Previously, there were concerns among investors about the possibility of these companies being delisted from U.S. exchanges due to the lack of inspections by the Public Company Accounting Oversight Board (PCAOB) until an agreement was reached in 2022.
The Role of PCAOB
The PCAOB was established in response to the accounting scandals involving Enron and WorldCom. It operates under the supervision of the Securities and Exchange Commission.
PWC Hong Kong and China Settlement
PWC Hong Kong and China self-reported violations after uncovering improper behavior related to internal training by some employees. In a statement, a spokesperson for PWC expressed satisfaction that the PCAOB recognized their exceptional cooperation as part of the settlement.
Shandong Haoxin’s Fine and Restrictions
As a result of its violations, Shandong Haoxin was fined approximately $1 million. Additionally, four of its auditors are now prohibited from participating in audits of U.S.-listed companies. The company is required to have an independent monitor and is not allowed to accept new U.S.-issuer clients. However, it can continue to serve its existing clients.
Accessing Information on Auditors
Investors interested in learning which other issuers a particular auditor oversees can visit the PCAOB website. The website provides a list of each U.S.-listed company associated with a specific auditor.
Acknowledgment from SEC Chair Gary Gensler
SEC Chair Gary Gensler commended the PCAOB’s actions, expressing satisfaction with their oversight of audit firms in China and Hong Kong. According to Gensler, American investors are better protected when the PCAOB can audit the auditors of issuers listed in the United States.
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