The Public Company Accounting Oversight Board has settled a disciplinary action against a Hong Kong firm and its U.S. affiliate over audit problems involving a U.S.-listed company based in China.

Audit firm AWC in Hong Kong is accused of relying on management representations, ignoring red flags indicating possible fraud, failing to assure its independence, and other violations in connection with 2010, 2011, and 2012 financial statements for a company listed on the NASDAQ. AWC in the United States is accused of violating PCAOB rules and U.S. securities laws by performing prohibited nonaudit services for the entity and assuming engagement team responsibilities when acting as the engagement quality reviewer for the audits. The settled disciplinary order also finds fault with two partners at each of the two firms.

Under the order, AWC in Hong Kong is censured and fined $10,000. Its registration with the PCAOB also is revoked with the right to reapply in two years. The U.S. firm is censured and its registration is suspended for one year. Fines across the four partners amount to civil penalties of $20,000 with various censures, bars, and limitations on practice.

The PCAOB says the Hong Kong firm issued unqualified audit opinions for the company that relied on management representations in auditing cash and revenue, even after auditors had evidence of fraud and undisclosed related-party transactions. The firm learned, for example, that the company chairman and an employee held significant amounts of company cash in their personal bank accounts and that an eleventh-hour material adjust to revenue originated from a sale to a business owned by the chairman’s son.

"Investors are relying on PCAOB-registered audit firms, including foreign-based firms, to perform their audit responsibilities as gatekeepers to our capital markets," said James Doty, chairman of the PCAOB, in a statement. The disciplinary action sends a signal that such firms and their personnel are accountable under U.S. law, he said.

That’s been a tough signal for the PCAOB to send given its continued inability to access registered firms in certain countries to conduct audit inspections as required under U.S. audit rules. Hong Kong and China are among a handful of countries that continue to raise legal obstacles to PCAOB inspection.

The PCAOB has not been entirely shut out of Hong Kong, however. The board inspected AWC in 2009 when it was called Albert Wong & Co., issuing a report in 2010. The report says inspectors dug into two audits and found problems in both, including a failure to identify departures from GAAP, a failure to properly audit the accounting for a reverse merger, and a failure to properly audit the issuance of preferred shares and related warrants. The PCAOB also issued inspections reports on the U.S. firm in 2013 and 2015, each indicating inspections of two audits, all of which contained deficiencies.