The firm, which was also censured, admitted to the facts, findings and violations.
This is the second time the PCAOB has taken enforcement action against a Hong Kong based firm for non-cooperation with an investigation. In January last year, it revoked PKF’s HK affiliate’s registration after the firm refused to make an associated person available for testimony.
“The Sarbanes-Oxley Act authorises the board to impose significant sanctions on any registered firm that refuses to produce requested information in board investigations,” said PCAOB chairman James Doty.
“This is an important tool in our work to protect investors and we will not hesitate to use it when a firm refuses to provide our enforcement staff with work papers and related information necessary to ensure compliance with PCAOB rules and US law.”
The Crowe Horwath case dates back to March 2016 when the board launched a formal investigation into the firm’s audits and reviews of the unnamed China-based client’s financial statements. Questions had been raised by the PCAOB’s division of enforcement and investigations during a review of the client’s filings with the US Securities & Exchange Commission (SEC).
Following an accounting board demand for audit work papers and other related documents, Crowe Horwath HK informed the board’s division of enforcement and investigations through its lawyers that it would not comply with the demand.
It said that it had asked for guidance from the Chinese Ministry of Finance and had been told that it must not produce papers maintained in the People’s Republic of China (PRC) in the absence of a request for assistance under a memorandum of understanding between the PCAOB, the Ministry of Finance and the China Securities Regulatory Commission.
In the Crowe Horwath case, the PCAOB warned it that obstacles created by foreign law did not provide a valid excuse for refusing to produce the information. Under the board’s registration rules, firms were obliged to comply with the demand.
It also made it clear that the MOU did not give the firm legal rights as it was a strictly non-binding agreement between the signing parties.
Despite the board’s arguments and the threat of disciplinary action, Crowe Horwath HK continued to assert that it was unable to provide audit work papers and other documents.
As the disciplinary order points out, this “failure to provide the required documents impeded the board’s ability to determine if [the] respondent’s audits were performed in accordance with PCAOB rules and standards, and whether violations occurred that justified sanctions”.
The firm has yet to respond to requests for a statement.
Over the years, a number of audit firms based in Hong Kong and China have tried to argue that if they produced audit working papers, they would be breaking Chinese law and would risk lengthy jail terms.
The Chinese affiliates of the Big Four and BDO, for example, were involved in a three-year battle with the PCAOB and the SEC over access to their audit papers relating to several US-listed Chinese clients, some of which had collapsed.
This stand-off ended in February 2015 when the Big Four agreed to a $2m settlement with the SEC.
By then the PCAOB had signed the MOU, enabling the three co-signatories to ask for production and exchange of audit documents that are relevant to formal investigations in both countries’ jurisdictions.
Access to Chinese firms for inspection purposes is still a work in progress, though, because the MOU only applies to enforcement actions, not inspections of firms which are blocked.
Under normal circumstances, the board says it would have inspected Crowe Horwath HK at least twice between 2011 and 2016 – in 2016 alone the firm issued 50 audit reports for 22 different clients required to file audited financial statements with the SEC.
Because it regards access to Chinese firms as fundamental to its ability to carry out its oversight duties, the board has not approved any new applications for registration from Hong Kong audit firms in the past five years.
As a PCAOB spokesperson pointed out, “If PCAOB inspectors are able to look at the work papers of Chinese auditors and to inspect them – as we do the work papers of auditors in approximately 40 other jurisdictions – we will learn from each other, we will share information about effective oversight of auditors under our respective jurisdictions, and investors will benefit.”
Like PKF, Crowe Horwath HK will be able to reapply for registration after the three years are up.