The Public Company Accounting Oversight Board is disciplining Crowe Horwath’s member firm in Hong Kong for refusing to turn over documents such as audit work papers to the board, revoking the Hong Kong firm’s registration with the PCAOB for at least three years.
The ban against Crowe Horwath HK CPA Limited is part of a larger battle by the PCAOB and the Securities and Exchange Commission to get more access to audit firms in China. In 2015, all of the Big Four firms paid a $2 million settlement to the SEC for refusing to provide audit documents.
Crowe Horwath HK agreed to the sanctions and admitted to the facts, findings and violations in the PCAOB’s order. In addition to revoking the firm’s registration, the PCAOB also censured Crowe Horwath HK.
“The Sarbanes-Oxley Act authorizes the board to impose significant sanctions on any registered firm that refuses to produce requested information in board investigations,” said PCAOB Chairman James R. Doty in a statement Tuesday. “This is an important tool in our work to protect investors, and we will not hesitate to use it when a firm refuses to provide our enforcement staff with work papers and related information necessary to ensure compliance with PCAOB rules and U.S. law.”
The network's U.S. firm Crowe Horwath LLP noted that it isn’t subject to the sanction. “The central issue in the revocation of Crowe Horwath (HK) registration was related to audits Crowe Horwath (HK) performed of US-listed Chinese companies,” said Crowe Horwath LLP spokesperson Amanda Shawaluk in an email to Accounting Today. “Crowe Horwath (HK) did not, in 2016, serve as a component auditor of any audits conducted by Crowe Horwath LLP under PCAOB standards. The revocation of Crowe Horwath (HK) does not impact the standing of Crowe Horwath LLP with the PCAOB.”
Crowe Horwath HK responded with a separate statement to Accounting Today. "Consistent with the PCAOB settlement order, CHHK was advised by various parties, including its outside PRC [People's Republic of China] counsel and representatives of the Ministry of Finance, that we should follow the relevant laws and regulations of the PRC, and the appropriate manner of producing the requested audit information was through official cross-border channels, in accordance with the May 2013 Memorandum of Understanding on Enforcement Cooperation between the PCAOB and PRC regulatory authorities," said the firm. "CHHK wished to cooperate and comply with the PCAOB's demand, yet as a CPA firm registered in the Hong Kong Special Administrative Region of the PRC, we were required to comply with PRC law that we believed prevented us from producing the requested information directly to the PCAOB. Unfortunately, like other registrants who have performed audits of Chinese companies, we found ourselves on the horns of a dilemma regarding whether to incur the risk of failing to cooperate with a PCAOB demand requiring the Firm to produce audit work papers and other documents versus PRC laws preventing it from complying with such requests in the absence of a valid MOU request, resulting in the Board's disciplinary action for noncooperation. We are pleased to have resolved this matter in an amicable manner to avoid the cost and uncertainty of litigation, thereby resulting in an agreement to a censure and revocation of our PCAOB registration, giving us the opportunity to reapply after three years. We look forward to continuing to assist our valued clients in achieving their goals in PRC and elsewhere."
Crowe Horwath HK was registered with the PCAOB starting in April 2010. From that time through last year, it issued 50 audit reports for 22 different publicly traded companies. All but two of those companies reported having operations in Mainland China, but because of the position taken by the Chinese authorities on refusing to provide audit documentation to overseas regulators, the PCAOB did not have access to the information it needed to inspect Crowe Horwath HK’s audit work as required by the Sarbanes-Oxley Act and PCAOB rules.
Last October, Crowe Horwath HK filed a form asking to withdraw from registration with the PCAOB, but the PCAOB decided that allowing the firm to withdraw while an investigation was pending would be inconsistent with the PCAOB’s responsibilities under Sarbanes-Oxley. In accordance with one of the PCAOB’s rules, it delayed a decision on Crowe Horwath HK’s withdrawal request pending an investigation by the PCAOB’s Division of Enforcement and Investigations.
“Regardless of their location, the PCAOB is prepared to bring disciplinary proceedings against registered audit firms that fail to comply with their obligations under U.S. law to provide information requested by the PCAOB,” said PCAOB Enforcement and Investigations director Claudius B. Modesti in a statement. “These firms are gatekeepers to protect investors in U.S. capital markets.”
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