The Public Company Accounting Oversight Board (PCAOB) found seven of eight audit engagements it reviewed in China and Hong Kong contained “unacceptable rates” of deficiencies. PCAOB Chair Erica Williams called the landmark inspections “a powerful first step toward accountability.”

Inspection reports for KPMG Huazhen (China) and PwC (Hong Kong) dated March 28 but publicly released Wednesday included deficiencies observed in all four of KPMG’s audits reviewed and three of four PwC audits, the PCAOB announced in a press release.

At KPMG, the deficiencies consisted of unsupported opinions by the firm in financial statement and internal control over financial reporting audits regarding revenue, unearned revenue, certain liabilities, long-lived assets, and journal entries. At PwC, weaknesses were noted regarding revenue and related accounts, a significant account, and significant transactions.

The PCAOB also found instances at both firms regarding failures to adhere to agency standards or rules; in the case of PwC, one instance of potential noncompliance with PCAOB rules related to maintaining independence.

“As I have said before, any deficiencies are unacceptable. At the same time, it is not unexpected to find such high rates of deficiencies in jurisdictions that are being inspected for the first time,” Williams said in the press release. “And the deficiencies identified by PCAOB staff at the firms in mainland China and Hong Kong are consistent with the types and number of findings the PCAOB has encountered in other first-time inspections around the world.”

In December, the PCAOB announced it received “complete access to inspect and investigate” audit firms in China and Hong Kong. The agency gained leverage in the region created by the Holding Foreign Companies Accountable Act passed by Congress in December 2020. The law states companies whose audit papers are not open for inspection by the PCAOB could be delisted from U.S. exchanges after two years of noncompliance.

The Chinese government previously blocked PCAOB access to the audit papers of approximately 200 firms located in China and Hong Kong.

In a response letter included in the PCAOB’s inspection report, leaders at PwC said the firm has “taken appropriate actions under both PCAOB standards and our policies” to address the deficiencies cited. The firm noted the agency’s observations did not result in any changes to the audit reports.

KPMG leadership in their response said the firm “conducted a thorough evaluation of the matters identified” by the PCAOB inspections and has “taken appropriate actions to address engagement-specific findings” in a manner consistent with PCAOB auditing standards and KPMG policies.