A US watchdog said it found unacceptable problems in audits of Chinese companies

A US government agency said on Wednesday that a US accounting watchdog had found unacceptable shortcomings in audits of dozens of US-listed Chinese companies conducted by KPMG in China and PricewaterhouseCoopers in Hong Kong.

The US Public Corporate Accounting Oversight Board (PCAOB) has published the results of its inspections after first accessing Chinese companies’ auditors’ records last year after more than a decade of negotiations with Chinese authorities. This access has prevented nearly 200 public companies based in China from potentially being kicked off US exchanges.

The deficiencies were so significant that the auditors failed to obtain sufficient evidence to substantiate the companies’ financial statements, PCAOB Chair Erica Williams told reporters Wednesday. It said the companies, two of the so-called “Big Four” in accounting, account for 40% of the market share of US-listed companies audited by Hong Kong and mainland China firms.

Hong Kong-based PricewaterhouseCoopers (PwC) said it was working with the PCAOB to address the issues raised, and noted that the inspection report marked a significant milestone in US-China cooperation. KPMG in China said in a statement that it had taken steps to address the issues PCAOB found.

While the findings are consistent with what the agency typically finds when first accessing a foreign country’s audit records, it is likely to raise concerns among global investors about the accuracy of the public financial statements of Chinese companies listed in the United States.

“The fact that we found so many deficiencies is really a sign that the inspection was successful, and now we can start doing the corporate accounting work and driving audit quality,” said Williams.

The PCAOB will give the two companies a year to address deficiencies around quality controls, Williams said, and the agency will make referrals to the agency’s enforcement team when appropriate. Such investigations could eventually lead to financial penalties or ban audit firms from doing work for listed companies in the United States.

PCAOB officials have already begun field work for inspections in 2023. By its work in 2023, the PCAOB expects it will have inspected auditors representing 99% of the work in the area.

Williams said the agency will continue to demand full access to do its work. If Chinese authorities begin to restrict access to inspections and investigations, a US law approved last year sets a two-year time limit for complying with or withdrawing from US exchanges.

(Reporting by Michelle Price and Chris Prentice)

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