With its negotiations over regulatory access to China stalled, the Public Company Accounting Oversight Board has settled a disciplinary order against a Hong Kong audit firm and three employees accused of failing to cooperate with a PCAOB investigation.
The PCAOB has revoked the registration of PKF HK, a firm based in Hong Kong, and censured the firm. The board says PKF and its employees declined to testify for an investigation in connection with the firm’s audits of a China-based company.
In addition to sanctions against the firm, three individuals at the firm have been barred from being associated persons, meaning they may not associate with a public accounting firm that is registered with the PCAOB. It also has the effect, says the PCAOB, of barring them from serving in an accountancy or financial management capacity for any issuer or broker or dealer.
The PCAOB says the firm refused to cooperate with a board investigation by asserting PCAOB investigative requests must be channeled through the Chinese government under a 2013 “memorandum of understanding” between the PCAOB and Chinese securities authorities.
The PCAOB says the MOU does not provide justification to refuse cooperation with a board inspection because the agreement does not alter a registered audit firm’s legal obligation to cooperate. “In unambiguous terms, the Sarbanes-Oxley Act and PCAOB rules require registered firms and their associated persons to cooperate with requests for information in board investigations,” said PCAOB Chairman Jim Doty in a statement.
The PCAOB has tried fruitlessly for several years to gain regulatory access to audit firms in China that are registered with the board and performing audit work relied on in U.S. capital markets. The MOU in 2013 looked like a breakthrough that might eventually open the door to inspection of Chinese firms but those talks broke off abruptly late in 2015.
Likewise, the Securities and Exchange Commission has tried to access Chinese companies to investigate accounting improprieties. The SEC resorted to enforcement measures when Big 4 affiliates in China refused to cooperate, asserting conflict between U.S. and China law. Ultimately, the SEC settled charges with each of the firms with small fines and an eventual flow of documents as requested by the SEC.
“As demonstrated here, the PCAOB is prepared to bring enforcement proceedings if parties fail to comply with the cooperation requirements imposed by U.S. law,” said Doty. “Failure to cooperate with an investigation frustrates the PCAOB's ability to protect investors.”