PCAOB leniency program | China Accounting Blog | Paul Gillis

PCAOB leniency program

The PCAOB has announced a new policy that offers leniency if firms turn themselves in for violations of PCOAB rules. The SEC has similar rules. These leniency programs make sense – they discourage firms from covering up and protect investors by getting at the problems quicker. 

Given that the PCAOB cannot do inspections in China at present, I doubt many Chinese audit firms are planning to turn themselves in. They should probably think twice about that. 

If there is a breakthrough in negotiations between U.S. and Chinese regulators over audit working papers and inspections, the problems of the firms may just be beginning. I expect that U.S. regulators will arrive loaded for bear. They will likely find a target rich environment, since I don’t believe most Chinese auditors have any idea about PCAOB inspections. Every U.S. audit partner I have talked to who has been through one says he would have traded it for a root canal any day. 

My recommendation is that the firms start making a list. At the top of that list I would put violations of the principal auditor rule. There are a number of situations where the Hong Kong firm is signing off on the accounts of U.S. listings while all of the audit work is done on the mainland. I have previously written about that problem with Hong Kong listed companies, but it also exists with a number of U.S. listed companies. 

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