Houston-based accounting firm MaloneBailey has responded to a recent alert from the Public Company Accounting Oversight Board that cautioned auditing firms against relying on foreign auditors, particularly in China, to do their work.

George Qin

The PCAOB issued the alert earlier this month (see PCAOB Warns about Using Work of Foreign Auditors). The alert essentially targeted U.S. public accounting firms that issue reports on financial statements filed by issuers that have substantially all of their operations outside of the U.S. The alert, spurred by observations gathered during the board’s inspection process, centers around the PCAOB standards applicable to using the work and reports of other auditors and supervising assistants.

The alert came in response to the growing number of foreign companies going public in the U.S., which are audited by U.S. public accounting firms, and makes reference to the fact that, over the past 27-month period ended March 31, 2010, at least 40 U.S. registered public accounting firms with fewer than five partners and 10 professional staff have issued audit reports on financial statements filed with the SEC by companies whose operations were substantially all in the China region.

In two examples provided in the alert, the PCAOB observed that U.S.-based audit firms engaged by Chinese companies did not travel to the China region to perform the audits nor did they employ staff with the language capabilities to competently supervise and review the audit work performed. These U.S. auditing firms relied solely on the work of another auditor (in China) as a basis for issuing their report.

“Investors are put at risk when the firm issuing the audit report has performed none of the procedures itself, or cannot effectively communicate with those conducting significant audit procedures because of language barriers,” said George Diacont, director of the PCAOB’s Division of Registration and Inspections.

Greg Scates, PCAOB Deputy Chief Auditor, told WebCPA:  “We’re finding in our inspections that sometimes the U.S.-based audit firm is not performing an adequate review of the work of the other auditor. PCAOB standards require that they do this. Their credibility is on the line.”

In response to the alert, MaloneBailey explained the firm’s use of Chinese auditors. “As a firm with a significant and growing presence in the Chinese marketplace, MaloneBailey acknowledges the concerns expressed in the alert as well as the importance of having ‘boots on the ground’ in China and a staff who possess the language, cultural, and technical expertise to effectively plan, supervise and review the audit work,” said Chinese audit practice leader and partner George Qin in a statement. “MaloneBailey has and will always be committed to ensuring high-quality financial reporting and auditing as well the proper application of PCAOB standards and SEC requirements and expectations.”

The firm said it supported the PCAOB alert. "We are doing exactly the right things," said MaloneBailey managing partner Wesley Middleton. "A lot of CPA firms are sitting back in the U.S. and they are auditing Chinese companies with the use of a subcontract Chinese auditing firm. We are not doing that. We are sending our people to China and we are putting our people on the ground. We are supervising. We are auditing ourselves. We are not the subject of that [PCAOB] memo."

In addition to Qin, MaloneBailey employs 25 Chinese nationals educated in the U.S. whom the firm said possess the requisite skills in terms of language, technical, and cultural expertise to manage the intricacies of conducting audits in China. Chinese audit staff, who have in-depth knowledge of U.S. GAAP, U.S. Generally Accepted Auditing Standards, and SEC rules, span all levels of the firm, including staff, senior, manager and partner levels. MaloneBailey’s presence in China is year round and constant, according to the firm. At present, four staff members, who were not only hired in the U.S. but also educated and trained in the U.S., have been relocated to China on a permanent basis to conduct audits and offer effective solutions and guidance for clients.

The number of MaloneBailey staff relocated to China permanently is expected to grow over the course of the coming months. Furthermore, Chinese audit staff from the Houston office travel to the China region on an ongoing monthly basis.

More information about MaloneBailey’s Chinese audit practice, as well as a sampling of clients, is available in both English and Mandarin on the firm’s website: http://www.malone-bailey.com/Chinese_audit_inEN.htm.