The U.S. Securities and Exchange Commission said Monday it is beginning administrative proceedings charging the Chinese affiliates of five major accounting firms with violating the Securities Exchange Act and the Sarbanes-Oxley Act for refusing to produce documents related to China-based companies under investigation by the agency for potential fraud against U.S. investors.
Some of the accounting firms have responded by saying their failure to cooperate reflects conflicting U.S. and Chinese laws.
The SEC states in its administrative proceedings order that “this action stems from respondents' willful refusal, in response to commission requests, to provide the commission with audit workpapers and other materials prepared in connection with audit work or interim reviews performed for Clients A, B, C, D, E, F, G, H and I in contravention of their legal obligations as foreign accounting firms.”
The SEC in the filing said it has ongoing fraud investigations concerning these clients, whowhich are not further identified, each of whose securities were registered with the commission, and whose principal operations were based in China.
The accounting firms named in the action are:
• Beijing-based BDO China Dahua CPA Co. Ltd., a unit of BDO International Ltd.
• Beijing-based Ernst & Young Hua Ming L.L.P., a unit of Ernst & Young Global Ltd.
• Beijing-based KPMG Huazhen (Special General Partnership), a unit of KPMG International Cooperative.
• Shanghai-based Deloitte Touche Tohmatsu Certified Public Accountants Ltd., a unit of Deloitte Touche Tohmatsu Ltd.
• Shanghai-based PricewaterhouseCoopers Zhong Tian CPAs Ltd., a unit of PricewaterhouseCoopers International Ltd.
The filing says Sarbanes-Oxley requires firms to product audit materials upon the SEC's request.
The SEC said an administrative judge will schedule a hearing and determine the appropriate remedial sanctions against the firms. The order requires the administrative law judge to issue an initial decision no later than 300 days from the date of service of the order, said the SEC.
SEC deregisters securities
The SEC said that as part of an initiative to address concerns arising from reverse mergers and foreign issues, through the work of its Cross Border Working Group, the agency has deregistered the securities of nearly 50 companies and filed fraud cases against more than 40 foreign issuers and executives.
Robert Khuzami, director of the SEC's division of enforcement, said in a statement: “Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud. Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions.”
In a statement, Ernst & Young Hua Ming said it “supports close working relationships between regulators to enable them to cooperate and share information with one another. We hope that an agreement can be reached between U.S. and Chinese regulators that will enable our compliance with all applicable laws and regulations.”
In a statement, Deloitte said: “The SEC's order instituting proceedings against the China member firms of five of the largest networks confirms that the issue of document production by Chinese accounting firms to foreign regulators is a matter that needs to be resolved on a profession-wide basis.
“While it is unfortunate that the two countries have not yet been able to find common ground on these issues, we remain hopeful that a diplomatic agreement can be reached, and we stand ready to assist that effort in any way we can.”
In a statement, PricewaterhouseCoopers said the SEC's action “is the result of conflicting laws between the U.S. and China. The fact that the action is being taken collectively against all of the four largest audit firms and one other firm demonstrates that this is a profession-wide issue, not unique to one firm. For its part, PwC China has cooperated with the SEC at every opportunity. However, PwC China will, and must, comply with its legal obligations under China law.
“This action involves an issue that needs to be resolved between the U.S. and China regulators as it impacts all audit firms in China serving clients who are registered with the SEC. PwC China hopes for continuing dialogue between those two parties to resolve the matter.”
Spokesmen for the remaining firms had no comment or could not immediately be reached.