PCAOB bans Crowe Horwath | China Accounting Blog | Paul Gillis

PCAOB bans Crowe Horwath

The PCAOB has revoked the registration of Hong Kong based Crowe Horwath for refusing to cooperate with document requests related to inspections.  Crowe Horwath argued that Chinese regulators forbid it from providing these documents directly to the PCAOB. The PCAOB had reached an agreement in 2013 with Chinese regulators for document production in the case of enforcement actions, but no agreement has been reached with respect to inspections. 

The PCAOB was set up as an independent audit regulator by the Sarbanes Oxley Act.  It has three primary functions; It sets standards for auditing of US listed companies, it inspects auditors work to determine whether the standards are followed, and it enforces instances of non-compliance. Inspections are the most important function.  All auditors of US listed companies, including foreign auditors are inspected at least every three years, with the largest auditors inspected annually.  

Soon after the PCAOB began international inspections over a decade ago, China balked at allowing inspections of Chinese firms citing national sovereignty and national secrecy concerns. China also forbade the PCAOB from inspecting firms based in Hong Kong to the extent the audits related to mainland companies.  

Crowe Horwarth has had its registration with the PCAOB revoked, which means that its 22 US listed clients (mostly microcaps) must find new auditors (and most of its employees must find new jobs). In January 2016, PKF Hong Kong faced a similar judgment. 

The Securities and Exchange Commission brought a similar case against the Big Four accounting firms a few years ago that was settled with payments of $500,000 each and an agreement by Chinese regulators to allow certain documents to flow to the SEC after review by Chinese authorities.  

While I think the PCAOB is right in its actions, I am disappointed that they do not pick on someone their own size. Most of the market capitalization of Chinese companies listed in the US belongs to companies audited by the Big Four, yet the PCAOB seems unwilling to take these firms on.  

Chinese regulators want the PCAOB to grant regulatory equivalency to China in the same manner as the European Union does. Under regulatory equivalency, foreign regulators are to treat the work of Chinese regulators as equivalent to their own, making separate inspections unnecessary. The PCAOB has rejected regulatory equivalency, insisting on at least joint inspections with foreign regulators.   

Interestingly, the European Union has withdrawn regulatory equivalency from Hong Kong, recognizing that Hong Kong’s self-regulation system is ineffective.  Hong Kong has proposed reforms to accountancy regulation, but these reforms have stalled out.

In today’s geopolitical climate I think a deal on PCAOB inspections of Chinese firms is unlikely. In the US, there is a strong movement to roll back Sarbanes Oxley, and it seems unlikely any cooperative deals could be reached with the Trump administration. 

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