The practice of the Hong Kong affiliates of the Big Four accounting firms are now under the spotlight following a U.S. judge's ruling against the Chinese units of PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst Young.
Cameron Elliot, an SEC administrative law judge, last month ruled that the Chinese units of the Big Four be suspended from auditing U.S.-traded companies for six months. Judge Elliot ruled that the audit firms disobeyed U.S. law when they refused to turn over documents about some of their clients to the Securities and Exchange Commission to aid the commission in investigating those U.S.-traded Chinese companies for possible fraud.
The Wall Street Journal reports that in some instances, a Hong Kong unit of a Big Four auditor acts as the company's official auditor, but the bulk of the audit work is outsourced to the same firm's affiliate in mainland China.
For instance, KPMG's Hong Kong affiliate was the principal auditor of three Chinese companies whose documents the SEC sought, but KPMG's Chinese affiliate did more than 90% of the audit work.
Under U.S. auditing laws, an audit firm should do a "material" amount of the work to be entitled to serve as a company's principal auditor and sign the audit opinion. The judge, however, didn't opine on whether such arrangements were proper, says the Journal.
According to the journal, the Big Four's Chinese and Hong Kong affiliates are free-standing companies legally distinct from each other, even though they're part of the same international network.