Core Summary

  • The U.S. Public Company Accounting Oversight Board (PCAOB) sanctioned a Hong Kong accounting firm and its owner for ignoring rules and standards while auditing the books of Luckin Coffee and two other China-based operating companies.
  • The PCAOB said Tuesday that Centurion ZD CPA & Co and its sole partner Chan Kam Fuk failed to properly perform risk assessments and obtain sufficient evidence when testing various risks, including in Luckin Coffee's 2021 audit. In 2020, the U.S. Securities and Exchange Commission (SEC) fined Luckin Coffee $180 million for fraudulently inflating its 2019 revenue, costs, and expenses.
  • The PCAOB announced the permanent revocation of Centurion's registration, a permanent bar on Chan, and a $75,000 fine. The PCAOB said Centurion and Chan neither admitted nor denied the findings.

In-Depth Analysis

Under Erica Williams—who served as PCAOB chair from January 2022 until her resignation on Tuesday—the audit regulator gained access for the first time to inspect accounting firms in China and brought enforcement actions against violators.

In recent years, the PCAOB has held firms in China accountable for violations, including fabricating audit reports, failing to maintain independence, improperly claiming other firms' work as their own, and sharing test answers in mandatory internal training courses.

"The PCAOB is committed to using the tools provided by the U.S. Congress and the access the PCAOB obtained through years of negotiations to hold Chinese auditors of Chinese companies accountable," Williams said in a statement Tuesday, before stepping down at the request of SEC Chair Paul Atkins.

Luckin Coffee hired Centurion as its auditor shortly after settling SEC fraud charges. However, in the subsequent year's audit, Centurion and Chan failed to use the company's false accounting information to assess misstatement risks and did not design audit procedures aimed at preventing fraud, the PCAOB said.

The PCAOB also noted that Centurion violated auditing standards in audits of two China-based listed companies—Greenpro Capital and Moxian—including failing to communicate with the companies' audit committees as required.

Additionally, the PCAOB's investigation of Centurion revealed that its quality control system failed to adequately ensure the firm assigned work to personnel with technical skills meeting PCAOB standards and that staff involved in audits demonstrated the professional skepticism required by PCAOB rules.

The SEC has appointed George Botic as acting PCAOB chair, effective Wednesday.

Botic is a certified public accountant who joined the PCAOB shortly after its establishment in 2002, serving as an inspection manager in the registration and inspections division starting in August 2003, according to his LinkedIn profile.

Botic became a PCAOB board member in 2023 after serving as director of the registration and inspections division. In that role, he oversaw the registration and inspection of all domestic and foreign accounting firms registered with the PCAOB, as well as all broker-dealer audits.

Botic also served as director of the PCAOB's Office of International Affairs, special advisor to former Chair James R. Doty, and deputy director of the registration and inspections division.

Earlier in his career, Botic was a senior manager at PricewaterhouseCoopers.