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SEC orders global accounting firm’s Chinese affiliate to pay $20 million for auditing failures

Securities SEC China Audit Enforcement Of Interest to Non-US Persons PCAOB

Securities

On September 29, the SEC issued a cease and desist order against the Chinese affiliate of a global accounting firm for allegedly failing to comply with U.S. professional auditing requirements when conducting component audits of U.S. issuers and auditing foreign companies listed on U.S. exchanges. According to the SEC, during the course of numerous audits, personnel at the Chinese affiliate allegedly, among other things, asked clients to choose their own samples for testing and complete required audit documentation purportedly showing that the Chinese affiliate had obtained and assessed supporting evidence for certain clients’ accounting entries. This was allegedly done in order to create the illusion that the required testing of clients’ financial statements and internal controls had been conducted when there was allegedly no evidence that it had in fact happened. The SEC noted that the alleged misconduct involved both junior and senior audit team members and demonstrated a lack of supervision by audit partners. Moreover, the Chinese affiliate’s alleged failure to follow required Public Company Accounting Oversight Board (PCAOB) auditing standards created a significant threat to U.S. investors.

“While the SEC’s action today does not implicate a violation of the Holding Foreign Companies Accountable Act, the action does underscore the need for the [PCAOB] to be able to inspect Chinese audit firms,” SEC Chair Gary Gensler said in the announcement. “A fundamental goal of the PCAOB’s inspection regime is to identify weaknesses in the firms’ quality control processes—the very weaknesses at issue in this case.”

Without admitting or denying the allegations, the Chinese affiliate agreed to settle the charges by paying a $20 million civil money penalty and implementing extensive remedial measures, including completing a review and assessment of its policies and procedures by an independent consultant and implementing a course of action to address identified deficiencies. Audit professionals at the Chinese affiliate who serve U.S. public company audit clients are also required to undertake additional training.