Securities Regulation Daily Wrap Up, ACCOUNTING AND AUDITING—PCAOB sanctions three KPMG China partners for insufficient audit evidence, (Mar 21, 2024)
Organizations Mentioned:KPMG Huazhen | KPMG Huazhen LLP | Public Company Accounting Oversight Board (PCAOB) | Tarena International, Inc.
The action is the fourth settled disciplinary order against a China- or Hong Kong-based firm since the PCAOB secured access to inspect those firms in 2022.
The Public Company Accounting Oversight Board (PCAOB) has sanctioned three partners of KPMG’s China affiliate KPMG Huazhen LLP for failure to obtain sufficient appropriate audit evidence to support the reported revenue in the 2017 financial statements of Tarena International, Inc. It is the fourth time since the Board secured in 2022 the right to inspect Chinese and Hong Kong firms that the PCAOB has taken action firms and individuals in those jurisdictions.
The PCAOB determined that each of the three partners violated PCAOB standards in connection with the firm’s audit of the 2017 financial statements of Tarena, a China-based provider of education services that is listed in the U.S. In 2019, Tarena restated its 2017 financial statements for intentional revenue inflation and improper charges against accounts receivable.
Insufficient audit evidence. According to the PCAOB’s order, the engagement partner and a second partner on the 2017 audit failed to obtain sufficient appropriate audit evidence to support Tarena’s reported revenue. In evaluating Tarena’s revenue, the two partners intended to rely on the company’s internal controls, including information technology-related controls. However, after learning of numerous unremediated deficiencies in Tarena’s IT controls, the partners continued to rely on those controls to support their audit conclusions as if those controls were effective, the Board stated.
The PCAOB also determined that the two partners failed to exercise due care and professional skepticism and failed to obtain sufficient appropriate audit evidence to support Tarena’s net accounts receivable. The enforcement staff found that the partners did not evaluate the reasonableness of Tarena’s allowance for doubtful accounts appropriately.
Specifically, the two partners did not obtain an adequate understanding of how management developed the estimate, nor did they appropriately evaluate its reasonableness, according to the Board. The partners also did not adequately consider evidence indicating that the estimate might not be reasonable.
The third partner had overall responsibility for the involvement of the firm’s IT professionals in the Tarena audit. In that capacity, the PCAOB said that he failed to supervise those IT professionals sufficiently, resulting in a failure to identify several deficiencies in the IT audit procedures.
Sanctions. The three KMPG China partners consented to the PCAOB’s order without admitting or denying the findings. All three partners were censured and fined. The engagement partner must pay a penalty of $75,000, and the second partner must pay $50,000. The supervising partner was fined $25,000.
The two partners that conducted the audit are barred from being associated persons of a registered public accounting firm but may petition the Board for reinstatement after one year. They also are required to complete continuing professional education before filing any petition for Board consent to associate with a registered public accounting firm.
The supervising partner is prevented from acting in certain roles on issuer audits for a one-year period, and also must complete additional continuing professional education within the next year.
Companies: KPMG Huazhen LLP; Tarena International, Inc.
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