PCAOB prohibits Marcum from doing China audits

The Public Company Accounting Oversight Board has imposed a $250,000 penalty on Marcum LLP and its Marcum Bernstein Pinchuk unit over audits of Chinese companies and prohibited the firm from auditing clients in China for three years.

The order, which the PCAOB posted last week, said the firm violated PCAOB rules and auditing standards for financial statements for 2013 and 2014. The name of the company wasn’t specified, but the PCAOB said it was originally a Delaware company that manufactures energy storage systems and related products, and in 2011 became majority owned by a firm based in Hong Kong. In 2012 and 2013, it moved its manufacturing operations to mainland China.

Courtesy of Marcum LLP

The PCAOB said that Marcum failed to perform appropriate procedures when auditing some “significant unusual transactions” between one of the company’s wholly-owned Chinese subsidiaries and a Chinese purchasing agent involving the subsidiary’s transfers of loan proceeds to the agent as prepayments to buy equipment and materials that the agent never delivered. The PCAOB noted that there were some fraud risks associated with these types of transactions because the agent who received the loan proceeds may have been an undisclosed related party. Marcum did not respond to requests for comment.

The PCAOB and the Securities and Exchange Commission have been cracking down on Chinese companies for not complying with PCAOB standards and threatened to delist Chinese companies after a string of auditing scandals involving companies including Luckin Coffee and GSX Techedu (see story).

Marcum, a New York-based Top 100 Firm, has specialized in auditing Chinese companies that trade on the U.S. capital markets, especially after acquiring Bernstein & Pinchuk LLP, a Shanghai-based firm, in 2010. They merged together their China auditing practices into an entity known as Marcum Bernstein and Pinchuk, or Marcum BP for short. Last September, both Marcum and Marcum BP were penalized $525,000 by the PCAOB for promoting their Chinese audit clients as investment opportunities during annual Chinese microcap conferences from 2012 to 2015 (see story).

Drew Bernstein, a co-founder and managing partner of Marcum BP, told Accounting Today recently during an interview before the latest PCAOB sanctions were announced why he thinks Chinese companies remain good investment opportunities despite the attempts by the PCAOB, the SEC and the Trump administration to crack down on Chinese firms and trade.

“The environment, especially politically toward Chinese companies, has been less than stellar,” he said. “We all understand that. Despite that, you’ve seen a host of Chinese companies going public. There have been a lot of proposals made to limit the ability of Chinese companies to go public. But the fact is that the door right now is still open. And while the door is still open, the Chinese companies are going to consider it as among one of their choices, of which they have many in this case.”

He noted that Chinese companies still see the U.S. capital markets as attractive. “In my opinion the U.S. market has been the gold standard for Chinese companies because of the different kinds of attributes it offers over the other exchanges,” he said. “For instance, the U.S. market offers very deep, diversified sources of capital. It gives a company the ability to do add-on rounds, raising money after you go public, which you can’t do on a lot of the foreign exchanges. For a Chinese company to be able to raise dollars rather than remidi is also a nice advantage especially for these Chinese unicorn companies that have business plans based on growth and innovation. They need capital. It also does other things too. It gives them international brand recognition. Sometimes for a Chinese company that doesn’t do business outside of China, being a U.S. company could also enhance their business.”

He noted that U.S. sanctions against Chinese companies can make it difficult to do business, however. “Don’t forget, all we do is check people’s businesses,” said Bernstein before the PCAOB prohibition was announced. “The sanctions that they’re putting against them don’t affect the auditing of a company. It affects the environment, but it doesn’t actually affect the auditing of a company unless restrictions are placed on us, which can result from that. My opinion is regardless of whether the company is Chinese, European, American, or any listed company, they deserve to have auditors. Any kind of environment that would prohibit them from having auditors would just be against the whole concept.”