China-based PwC affiliates fined $7M in historic PCAOB actions

PwC Hong Kong was fined $4 million and PwC China $3 million for failing to detect or prevent employee cheating on mandatory internal training exams, the PCAOB announced Thursday. The penalty against PwC Hong Kong is the largest the regulator has imposed against a China-based firm and the second largest in its history. The $3 million fine matches the third largest.

The PCAOB also fined China-based Shandong Haoxin Certified Public Accountants Co. and four of its associated persons a total of $940,000 for alleged violations of U.S. securities laws and PCAOB rules and standards.

The details: In December 2022, the PCAOB received “complete access” to inspect audit firms in China and Hong Kong. The Holding Foreign Companies Accountable Act, passed by Congress in December 2020, gave the regulator leverage by stating companies in the region whose audit papers were not open for inspection could be delisted from U.S. exchanges after two years of noncompliance.

In May, the PCAOB announced the findings of its first inspections of China- and Hong Kong-based firms. It noted “unacceptable” deficiency rates, including at PwC Hong Kong, where three of four audits reviewed included weaknesses in areas such as revenue and related accounts, a significant account, significant transactions, and independence.

Those findings did not mention alleged exam cheating, which has been a larger issue the PCAOB and Securities and Exchange Commission (SEC) have focused on in recent years. In June, the SEC announced a record $100 million fine against fellow Big Four firm EY regarding the matter.

At PwC Hong Kong, the PCAOB said it found more than 1,000 individuals engaged in improper answer sharing through the use of unauthorized software between 2018 and 2020. The number of individuals cheating at PwC China over the same time range was in the hundreds, per the regulator. Most of the participating employees worked in assurance.

At Haoxin, the PCAOB highlighted multiple alleged issues with the firm’s audits of the 2015-17 financial statements of data analysis software provider Gridsum Holding, including:

• Falsely certifying the audits were performed in line with PCAOB standards;
• Violations of independence and ethics requirements by adopting a predecessor auditor’s draft work papers as its own and telling Gridsum it could expect to receive an unqualified opinion before the engagement; and
• Providing false information to the PCAOB in its investigation.

Haoxin was fined $750,000, while its four associated persons received the remaining $190,000 in penalties.

Compliance considerations: Both PwC firms will review and improve their quality control policies and procedures to provide reasonable assurance employees act with integrity regarding internal training, the PCAOB said.

Haoxin must retain an independent monitor to review and advise on its policies and procedures—a landmark requirement imposed by the PCAOB against a China-based firm.

“The days of China-based firms evading accountability are over,” said PCAOB Chair Erica Williams in a statement. “The PCAOB is demonstrating that we will take action to protect investors in U.S. markets and impose tough sanctions against anyone who violates PCAOB rules and standards, no matter where they are located.”

Firm responses: A spokesperson for PwC on behalf of both its China and Hong Kong firms said in an emailed statement the firms self-reported to the PCAOB.

“After becoming aware of these issues, the firms investigated these matters promptly and took remedial action. This included blocking any further use of or dissemination of the technologies concerned and directing the retake of courses where applicable,” the statement said. “We have since emphasized to all of our people our policies regarding appropriate conduct during online training courses, along with highlighting the significance of ethical and responsible use of emerging technology.”

In its orders against both PwC China and Hong Kong, the PCAOB said the firms took “years” to report to PwC Global the alleged issues, only after the regulator conducted its first inspections in September 2022.

Haoxin, in an emailed statement, said it cooperated with the PCAOB “to the full extent we were allowed under Chinese regulations.”

“Integrity and adherence to professional standards have always been the ethics upheld within Haoxin,” the firm said. “We will continue to follow the PCAOB auditing standards, ethics and independence rules, and quality control standards and relevant Chinese laws and regulation and continue to provide high-quality audit services for Chinese companies going public in the United States.”

None of the firms admitted or denied the PCAOB’s findings.