The US regulator has instigated proceedings against the Chinese affiliates of the Big Four and BDO over nine of their audit clients which are listed on the US markets. All nine are currently under investigation for potential accounting fraud against US investors.
The SEC has accused the firms of refusing to cooperate and produce documents relating to audits of China-based companies under investigation by the SEC for potential accounting fraud against US investors.
The firms are accused of violating the Securities Exchange Act and the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on U.S. markets. The affiliate firms charged are BDO China Dahua, Deloitte Touche Tohmatsu, Ernst & Young Hua Ming and KPMG Huazhen and PricewaterhouseCoopers Zhong Tian.
SEC director of enforcement Robert Khuzami said, “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.”
However, the firms argue that under Chinese law accounting, they are not allowed to produce documents directly to any foreign regulator without Chinese government approval. As Deloitte points out, to comply with the SEC’s demands would place the firm and its personnel at “substantial risk of prosecution” under Chinese criminal law.
The firms will face a hearing on the issues within the next 10 months.
Earlier this year, the SEC issued two enforcement actions against Deloitte’s Shanghai practice over its refusal to produce documents relating to Chinese clients, including Longtop Financial Technologies Ltd. The firm had resigned abruptly as auditor to Longtop after becoming aware that the company had falsified company records relating to cash at bank and loan balances.
The SEC has launched an initiative to address concerns arising from reverse takeovers and foreign issuers. In the last few years it has deregistered the securities of nearly 50 companies and filed fraud cases against more than 40 foreign issuers and executives.