Macau Under Spotlight Amid U.S. Inspections of China-Based Audits

Lead auditors, often the U.S. entities of the Big Four, for U.S.-listed companies must supervise contributing auditors and assume responsibility for their work. An audit firm currently doesn’t have to disclose in its annual audit opinion as part of a company’s financial statements if it subcontracted work or the percentage of the work to another auditor. 

Investors want more disclosure on publicly traded companies’ total exposure to uninspected audit work by unregistered contributors, such as data showing uninspected work as a percentage of audit hours and companies’ assets and revenues, said Jeff Mahoney, general counsel at the Council of Institutional Investors, which represents pension funds and other large money managers. “We are aware that some investors think it is a material risk [to them] if the uninspected portion of an audit totals more than 20%,” Mr. Mahoney said. 

Lead auditors must disclose in a PCAOB filing the name of any firm that contributed more than 5% of total audit hours and the extent of its participation.

Jack Ciesielski,

owner of R.G. Associates Inc., an investment research firm and portfolio manager, thinks the disclosure requirements need to change because most investors aren’t aware of the contribution of outside auditors, even if it’s disclosed on the PCAOB’s website. Such disclosure in the annual report could lead investors to be more skeptical or vote against confirming a company’s auditor for another year, he said.

“The PCAOB will continue to strictly enforce its rules that limit the use of unregistered audit firms, and PCAOB will not hesitate to issue sanctions when these rules are violated to ensure investors are protected,” a spokesman for the regulator said. 

One recent scenario for which investors want more transparency involves audits conducted in Macau, which maintains its own jurisdiction and currency despite returning to Chinese rule from Portuguese control in 1999. 

To comply with the Holding Foreign Companies Accountable Act, the PCAOB in December 2021 issued a report in which it determined it can’t fully inspect or investigate registered audit firms based in mainland China or Hong Kong. It singled out Macau in its statement and said that mainland China doesn’t include Macau or Hong Kong, and there are no Macau-based audit firms registered with the PCAOB. 

Then, in August, the U.S. and China signed a landmark agreement giving U.S. audit inspectors full access to audit working papers of U.S.-listed Chinese businesses. China had previously denied U.S. regulators routine access to such documents on the grounds of national security. 

The PCAOB, which began inspections of China-based audits in September, will decide by year-end whether China is complying with the agreement. The agreement could prevent some 200 Chinese companies from being kicked off U.S. stock exchanges in early 2024. 

It’s unclear if any U.S.- or China-led audits that include a Macau component have ever been selected for review, said Francine McKenna, a financial-accounting lecturer at the University of Pennsylvania’s Wharton Business School. “We do not know if these firms, especially in the U.S., have been adequately supervising the Macau firms,” she said. The PCAOB doesn’t publicly disclose the companies whose audits it selects. 

Macau is home to substantial business for several U.S.-listed casino operators, whose audits are in part conducted by entities based there. Deloitte & Touche LLP audits

Las Vegas Sands Corp.

and

MGM Resorts International,

and Ernst & Young LLP audits

Wynn Resorts Ltd.

, each assisted by their respective Macau-based unit, records show. Deloitte is a sponsor of CFO Journal. The lead auditor, in these cases the U.S. entities, signs off on the audits.

Neither Macau unit, Deloitte Touche Tohmatsu Sociedade de Auditores nor Ernst & Young Auditores, is registered with the PCAOB, records show. Wynn declined to comment and Sands and MGM didn’t respond to requests for comment. 

The three casino companies, which have a combined roughly $55 billion in market capitalization, generate a significant chunk of their revenue from Macau. Last year, revenue from Macau operations composed 68% of total revenue for Las Vegas Sands, 40% for Wynn and 12.5% for MGM, securities filings show. 

The Macau firms’ work isn’t immune from PCAOB inspection. The PCAOB said that, during the inspections process, it generally has access to any information that was retained by the principal auditor. For example, if the PCAOB decides to inspect an audit led by a firm based in China or the U.S. and features a Macau-based firm that provided less than 20% of the work, the latter’s work would be part of the inspection. 

If a principal auditor violates the rules and allows an unregistered firm to perform substantial audit work, the PCAOB can sanction—and has sanctioned—the lead firm for violating these rules, a spokeswoman for the regulator said. For example, the PCAOB in August fined KPMG’s South Africa unit $200,000 over the improper use and reporting of an unregistered audit firm.

Rules also state that U.S. firms that work with an unregistered firm—for example, in Macau—can’t take on clients for which they don’t expect to reasonably complete quality audits.

Las Vegas Sands in October expanded its risk disclosures in its latest quarterly report to say that Deloitte’s U.S. unit wasn’t identified as a firm that the PCAOB is unable to inspect, but said that there is no assurance that future audit reports will be prepared by auditors that are able to be inspected by the regulator.

The China websites of the Big Four firms show Macau as one of the locations of their local offices. PwC Macau is a separate legal entity, but it is run as part of the firm’s China operations, a spokesman said. EY, Deloitte and KPMG’s Macau offices are each part of the China operations, which contain several legally separate entities, representatives for the firms said. 

Although the Big Four’s Macau units are separate entities, they are considered the offices of the China firm, which could be why the units haven’t registered with the PCAOB, Ms. McKenna said. “The China firm is taking responsibility, treating it as a branch office,” Ms. McKenna said.

Macau earlier this year overhauled its gambling rules to increase regulatory oversight over casino companies to more closely align their operations with China’s national-security needs. “Macau is certainly a high-risk environment, which means you’re looking for situations of the companies maybe operating illegally or skirting laws and regulations,” said Paul Gillis, an accounting professor at Beijing International Studies University.

—Michelle Chan contributed to this article. 

Write to Mark Maurer at mark.maurer@wsj.com