The Public Companies Accounting Oversight Board (PCAOB)’s first inspections of Chinese-based audit firms—the result of an agreement reached last year—have revealed significant deficiencies in the audits of U.S.-listed Chinese companies conducted by KPMG’s affiliate in mainland China and PwC’s member firm in Hong Kong, the PCAOB reported.

The PCAOB inspectors found Part I.A deficiencies in four of four of the audit engagements reviewed at KPMG Huazhen and three of four of the audit engagements reviewed for PwC Hong Kong.

“Both reports show unacceptable rates of Part I.A deficiencies, which are deficiencies of such significance that PCAOB staff believe the audit firm failed to obtain sufficient appropriate audit evidence to support its work on the public company’s financial statements or internal control over financial reporting,” PCAOB Chair Erica Williams said in a statement.

"KPMG Huazhen LLP acknowledges the findings of the PCAOB following its inspection and has taken steps to address the issues identified," said KPMG Huazhen in a statement emailed to Accounting Today.  "Audit quality is fundamental to our business and we continue to invest heavily in innovation, technology, people and training to create a stronger, more resilient audit business."

“Although a number of issues are raised by the PCAOB, the report also states that with respect to the audits inspected, none were found to have an incorrect opinion on financial statements,” PwC Hong Kong said, The Financial Times (FT) reported. “We are working with the PCAOB to address the issues raised, ... and we continue to invest significantly to enhance our audit quality.”

“The two firms we inspected in 2022 audited 40 percent of the total market share of U.S.-listed companies audited by Hong Kong and mainland China firms, and we are on track to hit 99 percent of the total market share by the end of this year,” said Williams. “So, there is no question that the PCAOB is prioritizing inspections that are the most relevant to investors on U.S. markets—because protecting investors is what this is all about.”