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KPMG China’s Mishaps Result in Three Audit Partners Being Fined By the PCAOB

The three KPMG Huazhen partners were docked a total of $150,000 for turning a blind eye to U.S. auditing standards.

The Public Company Accounting Oversight Board (PCAOB) doled out a total of $150,000 in fines to three partners at KPMG in China for turning a blind eye to U.S. auditing standards.

KPMG Huazhen partner Choi Chung Chuen was docked $75,000, Ma Hong Chao has to pay $50,000, and Dong Chang Ling was fined $25,000 as part of the settlement with the U.S. audit regulator.

The PCAOB found that Choi, Ma, and Dong violated PCAOB standards in connection with KPMG Huazhen’s audit of the 2017 financial statements of Tarena International, a mainland China-based education service provider listed in the U.S. In 2019, Tarena restated its 2017 financial statements for, among other things, intentional revenue inflation and improper charges against accounts receivable, according to the PCAOB.

Specifically, the PCAOB found that Choi and Ma, 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. In evaluating Tarena’s revenue, Choi and Ma planned to rely on the company’s internal controls, including IT-related controls. However, after learning of numerous unremediated deficiencies in Tarena’s IT controls, Choi and Ma improperly continued to rely on those controls to support their audit conclusions as if those controls were reliable.

The PCAOB also discovered that Choi and Ma failed to exercise due care and professional skepticism and failed to obtain sufficient appropriate audit evidence to support Tarena’s net accounts receivable. Specifically, they didn’t appropriately evaluate the reasonableness of Tarena’s allowance for doubtful accounts. Choi and Ma also didn’t obtain an adequate understanding of how management developed the estimate, didn’t appropriately evaluate its reasonableness, and didn’t adequately consider evidence indicating that the estimate might not be reasonable.

Finally, the PCAOB found that Dong, the partner with overall responsibility for the involvement of the firm’s IT professionals in the Tarena audit, failed to sufficiently supervise those IT professionals. As a result, Dong failed to identify several deficiencies in the IT audit procedures, according to the PCAOB.

“The failures uncovered by this investigation highlight how important the Board’s global reach over international firms and their associated persons is to fulfilling its investor protection mission,” Robert Rice, director of the PCAOB’s Division of Enforcement and Investigations, said in a statement.

In addition to the fines, the KPMG Huazhen partners, without admitting or denying the findings, consented to the PCAOB disciplinary order which:

  • Censures each partner;
  • Bars Choi and Ma from being associated persons of a registered public accounting firm with a right to petition the PCAOB for consent to associate with a registered public accounting firm after one year;
  • Limits Dong from acting in certain roles on issuer audits for a one-year period;
  • Requires Choi and Ma to complete continuing professional education before filing any petition for board consent to associate with a registered public accounting firm; and
  • Requires Dong to complete additional CPE over the next year.

The sanctions against the three KPMG partners is the PCAOB’s fourth settled disciplinary order against China- or Hong Kong-based firms or individuals since the regulator gained access to inspect and investigate firms headquartered in China and Hong Kong in 2022.

“The PCAOB will take action to protect investors in U.S. markets and hold accountable anyone who violates PCAOB rules and standards, no matter where they are located,” PCAOB Chair Erica Williams said.