Whereas a lot of the give attention to the continuing controversy over the audits of Chinese language firms listed on U.S. exchanges has targeted on the flexibility of the Public Firm Accounting Oversight Board to entry the workpapers of Chinese language auditors, lots of these Chinese language firms have elected to make use of U.S.-based accounting companies as their lead or major auditor. In some instances, the U.S.-based accounting companies have already or will start working with affiliated entities in these overseas jurisdictions, and in different instances they’ve or will start to contract with one other impartial accounting agency or particular person accountants situated in China or Hong Kong to help the U.S.-based accounting agency carry out parts of the audit work underneath the lead auditor’s administration and supervision.
For these accounting companies which have or are contemplating endeavor these engagements, you will need to have in mind the associated dangers with the intention to greatest take into account methods to mitigate them. The performing chief accountant of the Securities and Change Fee, Paul Munter, has issued a press release directed at these newly engaged lead audit companies situated exterior of China and Hong Kong for issuer audits of firms based mostly in China or Hong Kong or these contemplating such engagements to handle the particular challenges concerning whether or not such U.S.-based audit companies will have the ability to fulfill their tasks as lead auditor and carry out high-quality audits the place the issuer is situated.
Underneath both of the choice audit engagement constructions described, to adjust to the Sarbanes-Oxley Act and the Holding Overseas Firms Accountable Act and relevant auditing requirements, the SEC has made clear that, “Each place a duty on the lead auditor to find out whether or not it will possibly function lead auditor and fulfill these tasks previous to accepting the engagement, each place vital supervisory tasks, and the related potential for legal responsibility, on the lead auditor that the issuer engages; and each require that audit documentation have to be retained by or be accessible to the retained lead auditor’s workplace that’s issuing the audit report and should help the work carried out by another auditors concerned, together with auditors related to different places of work of the lead accounting agency, affiliated companies, or non-affiliates companies.
This current assertion from Munter ought to resonate with these accounting companies that audit issuer shoppers typically, however particularly in the event that they need to broaden their providers to carry out them for China-based issuer shoppers. Based mostly upon the 2022 enforcement actions so far and earlier than any PCAOB inspections had been performed in China or Hong Kong, the board has sanctioned numerous accounting companies, engagement companions, and engagement high quality overview companions for:
- Their failure to make well timed and correct Kind AP reporting to reveal the participation of some “different accounting agency” if that agency incurs greater than 5% of the whole audit hours;
- Use of unregistered companies (together with unregistered overseas companies or associates) that carried out materials providers — providers for which the engagement hours or charges represent 20% or extra of the whole engagement hours or charges;
- Failure to moderately plan the audit and supervise the audit work carried out; and,
- Associated high quality management deficiencies.
PCAOB Chair Erica Williams has confirmed the board’s dedication to proceed to actively pursue enforcement efforts, stating, “Relating to the enforcement, those that break the foundations ought to know that the PCAOB means enterprise. Since January, the enforcement workforce has doubled our common penalty in opposition to people and elevated the typical penalty in opposition to companies by greater than 65% in comparison with the final 5 years.”
On Aug. 26, 2022, the PCAOB introduced that it had signed a Assertion of Protocol with the China Securities Regulatory Fee and the Ministry of Finance of the Individuals’s Republic of China, which grants the PCAOB full entry to the audit work papers, audit personnel, and different info and data wanted to examine and examine any companies the PCAOB selects. The board started its inspections in September 2022 in Hong Kong places of work of chosen Chinese language firms’ audit companies.
Within the coming months, we are able to anticipate to study whether or not China is the truth is abiding by the settlement and now not obstructing the PCAOB’s efforts and the bases for figuring out whether or not any ongoing lack of cooperation the truth is exists. As of mid-November, it was reported by Reuters that, “U.S. regulators gained ‘good entry’ of their overview of auditing work performed on New York-listed Chinese language companies throughout a seven-week inspection, 4 sources with information of the matter stated — a key step ahead in resolving a long-standing bilateral dispute.”
Because the PCAOB’s inspections progress, it’s probably we’ll see extra enforcement actions associated to the identical violations seen in 2022 earlier than these inspections passed off associated to make use of of unregistered companies, failure to oversee and plan the audit, and incomplete or premature completion of associated disclosure types. We might also see extra areas of danger associated to privateness and information safety points and switch of knowledge between and amongst overseas international locations.
Subsequent steps for companies
To mitigate the dangers to accounting companies that audit U.S.-listed overseas firms typically, there are a number of essential concerns going ahead, lots of which needs to be undertaken earlier than accepting any engagement. Listed below are some examples:
- Whether or not your agency can act as lead auditor on the engagement pursuant to the related guidelines, together with planning the audit such that the lead auditor is performing the suitable proportion of the audit hours and charges for the engagement and has the flexibility to meaningfully and correctly supervise the work to be carried out no matter the place that work shall be performed.
- If you’re working with one other accounting agency or particular person accountants, take into account what reporting or disclosure necessities might exist and whether or not the agency has complied with them.
- Whether or not you’ll have adequate entry to the predecessor’s accounting agency to judge meaningfully their work papers and conduct inquiries with out limitations.
- Whether or not there are privateness and information safety legal guidelines which will restrict or impression the entry and use of knowledge and work product, together with the legal guidelines of overseas international locations and the character of the information that shall be acquired or used throughout the audit work and thereafter.
- Challenges that could be impacted by efficient communication, language boundaries, native legislation, and enterprise practices of foreign-based firms and the way greatest to handle them.
- Whether or not every member of the audit workforce and the audit workforce of another taking part accounting agency has the suitable degree of ability, information, and coaching to carry out the portion of the audit assigned.
- Whether or not there’s adequate time and devoted professionals to execute the audit.
- Whether or not there have been any previous inspection findings that must be addressed and, in that case, methods to affirm any required remedial actions which have the truth is been designed, applied, and are successfully working.
Whereas there are numerous extra essential concerns for every accounting agency, the message right here is that there needs to be a complete dialogue and significant analysis by the accounting agency’s decision-makers of whether or not to just accept any new engagement and/or proceed with an ongoing engagement, particularly for U.S.-based accounting companies seeking to broaden their providers into overseas international locations and territories like China and Hong Kong, which seem to have the total consideration of the SEC and PCAOB.