The Public Company Accounting Oversight Board today sanctioned Centurion ZD CPA & Co. and Chan Kam Fuk, permanently revoking the firm's registration and permanently barring the owner.
The Hong Kong-based firm and its owner violated PCAOB rules, auditing standards and quality control standards related to the audits of Chinese companies.
In connection with audits of two public companies and audit procedures for subsidiaries of a third public company, the firm and Chan failed to perform risk assessments and obtain sufficient appropriate audit evidence in testing risk areas.
One of these was the 2021 audit of Luckin Coffee. In 2020, an investigation by a special committee of Luckin's board of directors found that the company had fabricated transactions, resulting in significant inflation of net revenue, costs and expenses. The same year, Luckin also settled accounting fraud charges brought by the U.S. Securities and Exchange Commission. Luckin retained the firm and Chan as its auditor following that settlement. However, the firm and Chan failed to use information about this fraud in the subsequent year's audit to identify and assess risks of material misstatement or to design audit procedures to address fraud risks.
"This action is another example of how the PCAOB uses its unique access and authority to inspect and investigate Chinese auditors to protect investors," outgoing PCAOB chair Erica Williams said in a statement. "The PCAOB is committed to using the tools the U.S. Congress entrusted to it, and the access that the PCAOB spent years negotiating, to hold accountable auditors in China that audit Chinese companies."
The board also found that the firm violated auditing standards related to how it reported the audits of the two Chinese public companies, and failed to comply with rules in filing multiple required forms that inform the PCAOB and the investing public about other auditors participating in those audits, among other things. Chan was directly and substantially responsible for the audit reporting violations by the firm.
Finally, the numerous violations by the firm show that its system of quality control did not provide reasonable assurance that the firm assigned work to personnel with the technical proficiency required by PCAOB standards, and the work performed by engagement personnel met professional standards and regulatory requirements — especially with regard to exercising the professional skepticism required by PCAOB standards in the performance of issuer audits. As such, the firm also violated quality control standards.
"Today's order reflects the unique global reach of the PCAOB's enforcement program, and the Board's commitment to protect investors from auditors that have demonstrated, through numerous violations, a disregard for complying with PCAOB auditing standards and rules," Robert Rice, director of the PCAOB's division of enforcement and investigations, said in a statement.
Without admitting or denying the findings, Chan and the firm consented to the PCAOB's order, which permanently revokes the firm's registration, permanently bars Chan, and imposes a $75,000 civil money penalty, jointly and severally, on Chan and the firm.
