PCAOB update

Yesterday the PCAOB posted several updated documents with respect to foreign inspections of accounting firms. It updates this information twice a year. Four lists are provided:

Jurisdictions where firms have been inspected

China is not on this list.  Some Hong Kong firms have been inspected, but not with respect to mainland operations.

Jurisdictions where the PCAOB plans to do 2012 inspections.

China is on this list, although it seems improbable that the inspections will happen before December 31, 2012.

A list of firms that have not been inspected

There are six China and seven Hong Kong firms on this list.

Issuers where the PCAOB is denied access to inspect

This list includes 131 companies in China and 118 in Hong Kong based on auditor location.

KPMG Huazhen does not appear on the list of mainland firms that were not inspected (although its Hong Kong office is listed as uninspected).  I looked a sample of audit reports issued by KPMG and found that the Hong Kong office is the one issuing the report. This is a curious practice that is generally not followed by the other Big Four firms, which have the mainland office sign the report when the partner is based in a mainland office. 

Under auditing standards the audit report is to be signed by the principal auditor, and there are processes that need to take place if the principal auditor relies on the work of other firms, even when they are in the same network. It is misleading to investors if the Hong Kong firm signs off on the audit but does not actually do the work. I expect that KPMG is going to be challenged on this if and when the PCAOB finally gets to do inspections. 

This practices raises some interesting questions about KPMG Huazhen’s application to maintain its PCAOB registration. KPMG Huazhen apparently does not have any PCAOB audits that it signs. Presumably it plays a significant role in these audits, however, and if deregistered it would not be able to continue to do so.  

The new lists issued by the PCAOB do not seem to portend any major news. I think this is simply an update of information previously provided. The PCAOB does say that it will not remove any jurisdictions from its list of intended 2012 inspections without giving a reason for doing so. 

Copyright ©  2012   Paul L. Gillis all rights reserved