US oversight of accounting firms: The Hong Kong and ‘Big Four’ experience

“In the absence of sound oversight, responsible businesses are forced to compete against unscrupulous and underhanded businesses, who are unencumbered by any restrictions on activities that might harm the environment, or take advantage of middle-class families, or threaten to bring down the entire financial system.”— Barack Obama

On July 25 Michael Rapoport of the Wall Street Journal Online reported that the US Public Oversight Board (Public Company Accounting Oversight Board, or  PCAOB) sanctioned Crowe Horwath (HK) CPA Ltd. from auditing US traded companies for three years. This translates to the revocation of the accounting firm’s US registration, though it may reapply after the period of restriction.

The sanction was on account of the accounting firm’s refusal to turn over the audit work papers and related documents re audits of unnamed Chinese company that PCAOB was investigating. (The oversight of PCAOB on audits of all entities traded on US stock markets extends beyond the US shores.) It was reported that Crowe Horwath admitted to its conduct in settlement with the US government audit regulator.

The report further stated that the sanction was the second that PCAOB took against a Hong Kong audit firm. The Hong Kong accounting firm PKF was barred by PCAOB in January 2016 due to the firm’s refusal to cooperate in PCAOB’s investigation.

The sanctions by PCAOB also covered the “Big Four” accounting firms in the past. Rapoport said in 2015, PriceWaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young paid $2 million as settlement with the US Securities and Exchange Commission over their past refusal to hand over required work papers and documents.

One major observation worth citing on news affecting the accounting profession is the role of the professional accountant expressing an opinion on the financial statements of a client. One basic principle that the professional accountant observes is the principle of confidentiality.

The Code of Ethics for Professional Accountants (developed by the International Ethics Standards Board for Accountants) enumerates circumstances where disclosure of confidential information may be appropriate (Section 140.7)

  1. Disclosure is permitted by law and is authorized by the client;
  2. Disclosure is required by law; and
  3. There is a professional duty or right to disclose, when not prohibited by law.

In the cases mentioned by Rapoport, jurisdictional considerations may have been a factor in the professional accountants’ decisions not to cooperate with the US regulator and possibly, the clients’ wishes.

Close to home, there had been incidents of late involving listed companies with reference to audited financial reports of publicly listed companies. While it is a wish to have a Philippine counterpart of the PCAOB to protect the interests of the investing public and other third parties, of what relevance would it be if matters are settled for a consideration?


Dr. Conchita L. Manabat is the president of the Development Center for Finance and a trustee of the Finex Development and Research Foundation. A past chairman of the International Association of Financial Executives Institutes, she now serves as the chairman of the Advisory Council of the said organization. She is a member of the  International Auditing & Assurance Standards Board Consultative Advisory Group and the International Ethics Standards Board for Accountants CAG.

She can be reached at [email protected].

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Dr. Conchita L. Manabat is the President of the Development Center for Finance and a member of the Consultative Advisory Groups for the International Auditing & Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA). She founded and retired as CEO of the Deloitte firm in the country that originally carried her name, C.L. Manabat & Co. She was once the Chair of the Board of Accountancy.