The Accounting and Financial Reporting Council (AFRC) of Hong Kong has taken disciplinary action against PricewaterhouseCoopers (PwC) and two individuals associated with the firm for their roles in audit deficiencies.
AFRC’s sanctions relate to the audits of Dynasty Fine Wines Group and its subsidiaries for the financial years ending December 2010 and 2011.
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The council issued reprimands to PwC, Cheng Kwong On, the engagement partner for the audits in question, and Kong Ling Yin, Raymond, the engagement quality control reviewer.
Alongside the reprimands, the AFRC imposed fines totalling HK$1.6m ($205.8k), with PwC receiving a penalty of HK$800,000, Cheng HK$600,000, and Kong HK$200,000.
The sanctions follow findings that the audit work conducted by PwC on revenue recognition was deficient, and the firm failed to gather adequate audit evidence for the group’s revenue records.
This oversight led to the issuance of an unmodified audit opinion, which was later found to be incorrect.
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By GlobalDataAFRC Discipline head Hester Leung said: “Revenue recognition is a recurring area of concern for the AFRC. We have seen multiple cases involving auditors’ failures to obtain sufficient appropriate audit evidence in this critical aspect, often resulting from poor audit planning and inadequate risk assessment, and deficiencies in the design or execution of audit procedures.
“This case underscores the need for auditors to exercise professional skepticism, particularly in high-risk areas such as revenue recognition with heightened risk of fraud.”
The issue came to light after allegations surfaced in 2012 suggesting that the group’s reported revenues were overstated, with a significant number of sales being fictitious.
An internal investigation by the company confirmed that a large volume of wine products, reportedly sold to one of the group’s main distributors, had not been delivered and were instead stored in offsite warehouses.
As a result of these findings, the company adjusted its financial statements for the years 2010 and 2011, which showed that the group had incurred a loss in 2011, in contrast to the profit that had been previously reported.
The adjustments also indicated a substantial reduction in the group’s retained earnings for both years.
The auditors had relied on the group’s internal sales documents without verifying the actual delivery and acceptance of goods.
The council noted that there was no evidence of intentional or deliberate misconduct.
Recently, PwC has enhanced its financial systems and controls by adopting Oracle Fusion Cloud Enterprise Resource Planning (ERP) across its global network.
