US inspectors, after receiving access to auditors' books for the first time, discovered significant shortcomings in audits of companies based in China and Hong Kong that are listed on US stock exchanges.
The Public Company Accounting Oversight Board (PCAOB) said Wednesday that it uncovered major "deficiencies" after checking the work of KPMG Huazhen, which is headquartered in mainland China, and PwC's practice in Hong Kong.
The auditors "failed to obtain sufficient appropriate audit evidence to support [their] work on the public company's financial statements or internal control over financial reporting" at "unacceptable rates," Erica Williams, the body's president, said in a statement.
Deficiencies were found in 100% of the audits by KPMG Huazhen reviewed and 75% of those from PwC Hong Kong. The PCAOB scrutinized four audits from each firm for fiscal years generally ending in 2021.
"We identified problems, so now we can begin the work of holding firms accountable to fix them," Williams said. It is "not unexpected to find such high rates of deficiencies in jurisdictions that are being inspected for the first time."
In a statement, KPMG Huazhen said it "acknowledges the findings of the PCAOB following its inspection and has taken steps to address the issues identified."
"Audit quality is fundamental to our business and we continue to invest heavily in innovation, technology, people and training to create a stronger, more resilient audit business," the firm added.
PwC Hong Kong called the PCAOB inspection "an important milestone in cooperation between China and US regulators and for US capital markets."
"Although a number of issues are raised by the PCAOB, the report also states that with respect to the audits inspected, none were found to have an incorrect opinion on financial statements," it continued.
The results of the inspections come nine months after China agreed to allow US officials to examine the audit papers of accounting firms in mainland China and Hong Kong, ending a long stand-off.
US regulators had long lobbied for this access, worried that Chinese firms listed on Wall Street were misrepresenting their financial heath. Beijing had pushed back, citing national security concerns.
The breakthrough meant that more than 160 Chinese companies avoided being kicked out of the world's biggest stock market, as US regulators threatened if they weren't able to inspect their audits.
