Audits of US-Listed Chinese Firms Had Big Deficiencies: PCAOB

China’s securities watchdog said on Thursday it’s willing to work with US regulators to boost audit cooperation – following strong criticism of the initial results.

The remark from the China Securities Regulatory Commission (CSRC) came a day after the US accounting board said there were “unacceptable deficiencies” in audits of US-listed Chinese companies.

The deficiencies found by the US watchdog during their first inspection of the audits were normal, and Beijing would continue to work with the US, the CSRC said in a statement – to safeguard the rights and interests of global investors.

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The US Public Company Accounting Oversight Board (PCAOB) published the findings of its inspections on Wednesday after gaining access to Chinese company auditors’ records for the first time last year.

The audits were performed by KPMG in China and PriceWaterhouseCoopers in Hong Kong, the PCAOB said, after more than a decade of negotiations with Chinese authorities.

That access kept roughly 200 China-based public companies from potentially being kicked off US stock exchanges.

The deficiencies were so great that auditors failed to obtain enough evidence to substantiate companies’ financial statements, PCAOB Chair Erica Williams told reporters on Wednesday.

‘Results will help auditors rectify problems’

“We noticed that the US regulator said the deficiencies they found this time were normal for a first-time inspection,” the CSRC said in its statement, referring to the PCAOB.

“The inspection report also didn’t conclude that the audit opinions by relevant auditors were inappropriate,” said the CSRC, adding it believed the deficiencies found would help auditing firms rectify their problems and improve quality.

The firms, two of the so-called “Big Four” in global accounting, represent 40% of the market share of US-listed companies audited by Hong Kong and mainland China firms, she said.

PricewaterhouseCoopers (PwC) in Hong Kong said it is working with the PCAOB to address issues raised and noted the inspection report marks an important milestone for US and Chinese cooperation.

KPMG Huazhen in China said in a statement it has taken steps to address the issues the PCAOB had found.

While the agency said it usually discovers problems when first gaining access to a foreign country’s audit records, the deficiencies may raise worries among investors over the accuracy of US-listed Chinese companies’ public financial statements.

Some investors, though, said the findings could ultimately help improve Chinese company accounting.

‘It shows the inspection process worked’

“The fact that we found so many deficiencies is really a sign that the inspection process worked, and now we can go about the work of holding firms accountable and driving audit quality,” Williams said.

The agency said it inspected eight audits. It did not disclose which companies’ audits it had selected for inspection, but Reuters previously reported that Alibaba Group Holding and Yum China Holdings were among them.

The two companies did not immediately respond to requests for comment.

“We shouldn’t be surprised that deficiencies were found,” said Brendan Ahern, chief investment officer of Krane Funds Advisors, which operates China-focused funds.

“One would assume the auditors will take the guidance and adjust their practices going forward.”

The PCAOB will give the two auditors a year to remediate deficiencies around quality controls, and the agency will make referrals to the agency’s enforcement team where appropriate, Williams said.

Such investigations could ultimately lead to monetary penalties or barring audit firms from doing work for US-listed companies.

PCAOB officials have already begun fieldwork for 2023 inspections. With its 2023 work, the PCAOB expects it will have inspected auditors representing 99% of the work in the region.

The agency will continue to demand full access to do its work, Williams said. If Chinese authorities begin to limit access for inspections and investigations, a US law agreed to last year sets a two-year clock for compliance or ouster from American exchanges.