Announced today, the PCAOB has sanctioned three partners of KPMG China for various violations of PCAOB standards, none of which are uniquely egregious but newsworthy regardless. The settlement announced today is the PCAOB’s fourth settled disciplinary order against China- or Hong Kong-based firms or individuals attributable to the historic access the PCAOB secured to inspect and investigate firms headquartered in China and Hong Kong in 2022. This right here is why they wanted access so bad.
Today’s lucky contestants are CHOI Chung Chuen (“Choi”), MA Hong Chao (“Ma”), and DONG Chang Ling (“Dong”), all partners of mainland China-based KPMG Huazhen LLP.
The three were accused of violating PCAOB standards in connection with the firm’s audit of the 2017 financial statements of Tarena International, Inc. (n/k/a TCTM Kids IT Education Inc.), a mainland China-based education service provider listed in the United States. In 2019, Tarena restated its 2017 financial statements for, among other things, intentional revenue inflation and improper charges against accounts receivable.
Tarena’s audit committee opened an independent investigation in April 2019 and retained Kirkland & Ellis International LLP as independent legal counsel to advise the committee. K&E was assisted by Deloitte & Touche Financial Advisory Services as forensic accounting expert.
That investigation revealed quite a bit:
- Revenue Inaccuracies: The Audit Committee’s independent review found that the Company’s reported revenues for fiscal years 2014, 2015, 2016 and 2017 and previously announced unaudited revenues for each quarter of and full year 2018 were not accurate. Factors contributing to the misstatement of revenue included intentional revenue inflation, inaccurate student account, status and loan data recorded in the company’s customer relationship management (CRM) system, premature recognition of revenue from certain students, and inaccurate accounting treatment of tuition refunds.
- Expense Inaccuracies and Irregularities: The audit committee discovered instances of improper charges against accounts receivable and/or bad debts through payment to third parties, as well as guarantee payments to certain financial institutions or peer-to-peer financial tools for certain overdue student loans. The audit committee also identified certain expenses that were not supported by appropriate documentation and indications that funds or other benefits were provided to third parties contrary to company policy.
- Conflicts of Interest and Related Party Transactions: The audit committee found evidence that the company engaged in business transactions with organizations owned, invested in or controlled by company employees or their family members which in some instances were not properly disclosed by the company.
- Interference With External Audit Process: It was found that certain employees interfered with the external audit of the company’s financial statements for certain periods.
Back to the PCAOB order against Choi, Ma, and Dong. 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 information technology-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 effective.
The PCAOB also found 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 did not appropriately evaluate the reasonableness of Tarena’s allowance for doubtful accounts. Choi and Ma did not obtain an adequate understanding of how management developed the estimate, did not appropriately evaluate its reasonableness, and did not 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.
Without admitting or denying the findings, the respondents consented to the PCAOB order that includes censure, civil money penalties in the amounts of $75,000 on Choi, $50,000 on Ma, and $25,000 on Dong, and the usual stuff like Choi and Ma being barred for at least a year and continuing professional education for all involved.
Earlier settled enforcements with China firms are below. Two were for violating PCAOB quality control standards related to integrity and personnel management (they were sharing exam answers), the third was more serious with issuing a false audit report, failing to maintain independence from their issuer client, and improperly adopting the work of another accounting firm as their own among the violations.
🚨PDF alert🚨
- PricewaterhouseCoopers Zhong Tian, LLP (“PwC China”)
- Hong Kong-based PricewaterhouseCoopers (“PwC Hong Kong”)
- Shandong Haoxin Certified Public Accountants Co., Ltd. (“Haoxin”)
Article:
PCAOB Sanctions Three Partners of KPMG China for Violations of Audit Standards [PCAOB]
