As we begin to take a look back at the year that was 2019, one of the weird things public accounting firms were disciplined for this year by the PCAOB was for not disclosing that they’ve been the focus of a non-PCAOB disciplinary hearing.
According to PCAOB Rule 2203, if a firm is a defendant or respondent in an administrative or disciplinary proceeding that was initiated by another regulator, like the SEC or the Commodity Futures Trading Commission, it has to let the PCAOB know by filing Form 3, Special Report, within 30 days after the event. The firm also has to let the PCAOB know that the disciplinary proceeding has been wrapped up.
RSM US was busted in March and fined $15,000 because it was involved in two such disciplinary proceedings—one that concluded in October 2010 and another that concluded in June 2018—but didn’t file a Form 3 with the PCAOB until Nov. 30, 2018, eight years after the first proceeding ended and more than four months after the second one ended.
Deloitte’s affiliate in Colombia was fined $15,000 and RSM’s Hong Kong affiliate was fined $10,000 in April by the PCAOB for the same reason.
Today, two more firms were fined by the PCAOB for failing to timely disclose certain reportable disciplinary events they had with the Hong Kong Institute of Certified Public Accountants (HKICPA). PwC in Hong Kong and BDO in Hong Kong were each fined $10,000 for breaking PCAOB Rule 2203.
According to the disciplinary order, here’s why PwC Hong Kong was fined:
On or about December 17, 2015, the Firm became aware the HKICPA had initiated a disciplinary proceeding against the Firm and one of its partners in connection with the Firm providing professional services for a client that was not an issuer (the “2015 HKICPA Proceeding”).
On or about February 23, 2017, the Firm became aware the 2015 HKICPA Proceeding had concluded. The 2015 HKICPA Proceeding qualified as an Item 2.7 Proceeding.
On or about March 2016, the Firm became aware the HKICPA had initiated and simultaneously concluded a separate disciplinary proceeding against it (the “2016 HKICPA Proceeding”) in connection with the Firm providing professional services for a client that was not an issuer. The 2016 HKICPA Proceeding also qualified as an Item 2.7 Proceeding.
In violation of Rule 2203, the Firm failed to file a Form 3 with respect to the initiation and conclusion of these two proceedings.
According to the Form 3 disclosing the 2015 HKICPA proceeding, which wasn’t filed with the PCAOB until Nov. 25, 2019, the matter involved:
… the accounting treatment of a shortfall arising from disposal of a company’s subsidiary to its controlling shareholder in unaudited pro forma financial information appearing in a 2013 VSD circular of Xiwang Sugar Holdings Company Ltd. The HKICPA considered the HKFRS 10 [Hong Kong Financial Reporting Standard 10] required the entity to reflect the loss in the income statement and that the documentation in the work papers relating to this judgmental issue was inadequate.
PwC and partner Michael Chan Wai Hong were ordered to jointly make a contribution to the HKICPA’s costs in the amount of HK$108,000.
The 2016 HKICPA proceeding might have involved this:
The Hong Kong Institute of Certified Public Accountants has undertaken regulatory action against PricewaterhouseCoopers (PwC), for its failure or neglect to observe, maintain or otherwise apply professional standards issued by the Institute.
PwC audited the consolidated financial statements of a Hong Kong listed company and its subsidiaries for the year ended 31 March 2012. The relevant financial statements contained an understatement of tax expenses arising from the gain on disposal of certain properties held by a PRC subsidiary. PwC failed to detect the error and issued an unmodified opinion in the relevant financial statements.
The Institute concluded that PwC was in breach of paragraph 13 of Hong Kong Standard on Auditing (HKSA) 250 Consideration of Laws and Regulations in an Audit of Financial Statements and paragraph 6 of HKSA 500 Audit Evidence for failure to design and perform audit procedures to obtain sufficient appropriate audit evidence that could support their conclusion regarding the PRC tax expenses and the listed company’s compliance with the PRC tax laws and regulations.
PwC was ordered to pay an administrative penalty of HK$35,000 and costs of HK$39,655.90, which included costs incurred by the Financial Reporting Council of HK$29,655.90.
Now to BDO Hong Kong, which was a little tardy in telling the PCAOB about two HKICPA disciplinary hearings, according to the PCAOB order:
During July 2014 and January 2018, the Firm became aware that the HKICPA had initiated two separate disciplinary proceedings against it. Each of the proceedings related to the provision of professional services by the Firm to Hong Kong companies that were not issuers.
The Firm first learned of the initiation of each of the proceedings on or around the following respective dates:
- Proceeding 1: July 18, 2014
- Proceeding 2: January 17, 2018
In addition, the Firm learned of the conclusion of each of the proceedings on or around the following respective dates:
- Proceeding 1: September 26, 2014
- Proceeding 2: September 12, 2018
In violation of Rule 2203, the Firm failed to file a Form 3 with respect to the initiation and conclusion of these two proceedings until April 3, 2019.
On Sept. 26, 2014, BDO and director Choi Man On were punished for their failure or neglect to observe, maintain, or otherwise apply a professional standard issued by the HKICPA. They were ordered to pay a penalty of HK$30,000, as well as the costs of the disciplinary proceedings, which was HK$25,080.
On Sept. 12, 2018, the HKICPA fined BDO and accountant Lam Pik Wah a combined HK$100,000 and ordered them to pay costs of the disciplinary proceedings of HK$134,394.60 for their failure or neglect to observe, maintain, or otherwise apply a HKICPA professional standard.