News you may have missed from the US regulators, week ending Friday May 12, 2023.

PCAOB cites major deficiencies in inspection reports for mainland China, Hong Kong audit firms

On Wednesday, the Public Accounting Oversight Board (PCAOB), the US accounting watchdog, said it found deficiencies in audits of US-listed Chinese companies performed by KPMG in China and PricewaterhouseCoopers (PwC) in Hong Kong.

The PCAOB published the findings of its inspections after finally getting access to Chinese company auditors’ records last year following more than a decade of negotiations with Chinese authorities. This access kept about 200 China-based public companies from potentially being kicked off US stock exchanges.

PCAOB Chair Erica Williams said that reports show unacceptable rates of Part I.A deficiencies, which are deficiencies of such significance that PCAOB staff believe the audit firm failed to obtain enough evidence to substantiate companies’ financial statements.

“The power of transparency applies public pressure for firms to improve.”

Erica Williams, Chair, PCAOB

The PCAOB inspected a total of eight engagements in 2022 – four at each of the two firms, and it found Part I.A deficiencies in 100% (four of four) of the audit engagements reviewed at KPMG Huazhen and 75% (three of four) of the audit engagements reviewed for PwC Hong Kong.

“By shining a light on deficiencies, our inspection reports provide investors, audit committees, and potential clients with important information so they can make informed decisions and hold firms accountable. And the power of transparency applies public pressure for firms to improve,” said Williams.

On December 18, 2020, Congress passed the Holding Foreign Companies Accountable Act (HFCAA), requiring the US Securities and Exchange Commission (SEC) to identify public companies that have retained a registered public accounting firm to issue an audit report where the firm has a branch or office that: (1) is located in a foreign jurisdiction, and (2) the PCAOB has determined that it is unable to inspect it completely because of a position taken by an authority in the foreign jurisdiction. 

Under the HFCAA and its December 2022 amendments, the number of consecutive years a foreign issuer can refuse such inspection before the SEC must impose an initial trading prohibition on the issuer’s securities is two years. So, once an issuer is so identified for two consecutive years, the SEC is required under the HCFAA to prohibit the trading of the issuer’s securities on a national securities exchange and in the over-the-counter market.

Robinhood says it’s being investigated for employees’ use of off-channel comms – SEC filing

In its most recent 10-Q filing with the US Securities and Exchange Commission (SEC), Robinhood Markets Inc said regulators are investigating the firm’s compliance with recordkeeping requirements, including employees’ use of “off-channel communications.”

It said it is cooperating with probes by both the SEC and FINRA regarding its compliance with recordkeeping requirements regarding off-channel communications.

Robinhood also said in the filing that the agencies were examining its reporting of fractional share trades; its compliance with FINRA registration requirements for member personnel; marketing involving social media influencers and affiliates; and RHS’ compliance with best execution obligations, among other things.