PCAOB Sanctions Three Partners of KPMG China for Audit Standards Violations

The Public Company Accounting Oversight Board (PCAOB) has announced disciplinary sanctions against three partners of mainland China-based KPMG Huazhen LLP. Choi Chung Chuen, Ma Hong Chao, and Dong Chang Ling, collectively referred to as the "Respondents," have been penalized for violations of PCAOB standards, as revealed in a settled disciplinary order issued by the PCAOB.

This enforcement action marks the PCAOB's fourth disciplinary order against firms or individuals based in China or Hong Kong, underscoring the regulatory body's commitment to ensuring compliance and accountability in global financial markets.

According to the PCAOB's findings, the Respondents were implicated in violations related to the Firm's audit of the 2017 financial statements of Tarena International, Inc. (now known as TCTM Kids IT Education Inc.), a mainland China-based education service provider listed in the United States. Tarena had restated its 2017 financial statements in 2019, citing intentional revenue inflation and improper charges against accounts receivable among other issues.

The PCAOB determined that Choi and Ma, serving as the engagement partner and a second partner on the 2017 audit respectively, failed to obtain sufficient appropriate audit evidence to support Tarena's reported revenue. Despite learning of significant deficiencies in Tarena's internal controls, including IT Controls, the two partners continued to rely on these controls improperly, without adequate verification of their effectiveness.

Furthermore, the PCAOB found that Choi and Ma neglected to exercise due care and professional skepticism, particularly concerning Tarena's net accounts receivable. Their failure to evaluate the reasonableness of Tarena's allowance for doubtful accounts and to adequately scrutinize management's estimation methods contributed to the audit shortcomings.

Dong, who held overall responsibility for involving the Firm's IT professionals in the Tarena audit, was also cited for inadequate supervision of these professionals, leading to several deficiencies in the IT audit procedures going unnoticed.

Commenting on the investigation's outcomes, Robert E. Rice, Director of the PCAOB's Division of Enforcement and Investigations, emphasized the critical role of the PCAOB's global reach in safeguarding investor interests.

In response to the disciplinary action, the Respondents, without admitting or denying the findings, consented to the PCAOB's order. The sanctions imposed include censure, civil money penalties ranging from $25,000 to $75,000, association bans, limitations on roles in issuer audits, and mandatory continuing professional education requirements.

This enforcement action underscores the PCAOB's unwavering commitment to maintaining audit quality and ensuring the accountability of accounting professionals, particularly in the context of international audits. As regulatory scrutiny intensifies, adherence to professional standards and rigorous oversight remain imperative for firms operating in global financial markets.

The GRC Report is your premier destination for the latest in governance, risk, and compliance news. As your reliable source for comprehensive coverage, we ensure you stay informed and ready to navigate the dynamic landscape of GRC. Beyond being a news source, the GRC Report represents a thriving community of professionals who, like you, are dedicated to GRC excellence. Explore our insightful articles and breaking news, and actively participate in the conversation to enhance your GRC journey.