The Public Company Accounting Oversight Board (PCAOB) announced that it has censured Friedman LLC, a New York-based accounting firm, and imposed a $100,000 civil penalty for the firm’s failure to reasonably supervise two unregistered Chinese affiliate firms in audits of 12 different public companies with operations in China.
Friedman consented to the PCAOB’s order and the disciplinary action without admitting or denying the findings.
According to the PCAOB’s order, Friedman allowed two unregistered accounting firms based in the People’s Republic of China—Peking Certified Public Accountants and Beijing Baijielai Financial Consulting—“to play a substantial role in audits of the financial statements of 12 issuer clients for fiscal years 2017 and 2018.”
“Friedman knew, or should have known, that the unregistered firms were required to register with the Board before the firms played a substantial role in any issuer audits,” the PCAOB stated in its order. “Friedman, however, failed to take any steps to ensure that the unregistered firms’ participation in the audits was consistent with PCAOB registration requirements and that the unregistered firms did not ‘play a substantial role’ in the audits.”
The 20 Percent Threshold
The PCAOB found that “participation by the unregistered firms in the audits in many instances far exceeded the 20 percent substantial role threshold, including two audits in which Peking CPAs incurred 52 percent of the total audit hours,” according to its order. Due to “inadequate planning and oversight,” Friedman “failed to reasonably supervise its associated persons pursuant to Section 105(c)(6) of the Act and failed to comply with PCAOB rules and standards concerning due professional care and audit planning.”
These repeated violations further demonstrate that “Friedman failed to establish and implement adequate quality control policies and procedures, including monitoring procedures, concerning the use of work of other accounting firms, in violation of PCAOB quality control standards,” the PCAOB order stated.
“PCAOB rules are crystal clear: Firms playing a substantial role in the audits of public companies must register with the PCAOB. Those who break the rules and put investors at risk will be held accountable,” said PCAOB Chair Erica Williams. 
Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.