The Public Company Accounting Oversight Board imposed monetary penalties and other sanctions Tuesday against two accounting firms in the U.S. that had been working with unregistered auditing firms in China.
The cases were called separate, unrelated matters, but the sanctions were announced simultaneously. They involved WWC PC, a firm in San Mateo, California, that is headquartered in Hong Kong, and JLKZ CPA LLP, a firm headquartered in Flushing, New York, that worked with SBA Stone Forest CPA Co. Ltd., a firm in Shanghai, China. A manager at WWC declined to comment on the case and JLKZ CPA did not immediately respond to a request for comment.
Both matters involved violations of the Sarbanes-Oxley Act and PCAOB rules and standards in connection with the use of unregistered accounting firms in conducting issuer audits.
“To protect investors, the PCAOB has clear and important rules that require accounting firms to register with the board before playing a substantial role in audits of public companies,” said PCAOB chair Erica Williams in a statement Tuesday. “When firms that issue audit reports fail to ensure that their use and supervision of unregistered accounting firms complies with the law, we will hold them accountable.”
The cases come at a time when the PCAOB has been engaged in talks with Chinese authorities to resolve a years-long standoff over giving the PCAOB access to inspect auditing firms in China. In 2020, Congress passed the Holding Foreign Companies Accountable Act, which bars companies from being traded on U.S. markets if their auditing firms can’t be inspected by the PCAOB for three years in a row. The SEC announced plans to delist several Chinese companies, prompting Chinese securities authorities to announce last month they were making positive progress on their negotiations with the PCAOB, but the PCAOB said the speculation on an agreement was “premature,” insisting that it be allowed to inspect audit work papers (see story).
The PCAOB said the WWC matter is the first in which the board has imposed sanctions for a failure to reasonably supervise an unregistered firm. WWC used audit work performed by its unregistered Hong Kong affiliate in 10 issuer audits but failed to reasonably supervise the affiliate, according to the PCAOB. The board censured WWC, imposed a $50,000 civil money penalty, and ordered the firm to take steps to improve its quality control policies and procedures.
The JLKZ matter is the first in which the PCAOB said it has imposed sanctions against a firm for issuing an audit report where a separate, unregistered firm had conducted the underlying audit.
Under an arrangement with the unregistered Chinese firm, JLKZ issued audit reports for two issuers after employees at the Chinese firm acted as the engagement partner, audit staff, and engagement quality reviewer for the audits. Most of the audit fees went to the unregistered Chinese firm. The PCAOB found that JLKZ violated PCAOB standards by issuing audit reports where it had not conducted the underlying audits. It also found that JLKZ managing partner Jimmy P. Lee directly and substantially contributed to the firm’s violations.
The PCAOB imposed a total penalty of $50,000 on JLKZ and Lee, censured them, and restricted for two years JLKZ’s ability to accept new issuer or broker-dealer audit engagements.