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SEC Takes Action Against Accounting Firms' Chinese Affiliates

by Glen Shapiro,, New York

05 December 2012

The United States Securities and Exchange Commission (SEC) has begun administrative proceedings against the Chinese affiliates of five large accounting firms for refusing to produce audit work papers and other documents related to China-based companies under investigation for potential accounting fraud against American investors.

The SEC has charged the Chinese affiliates of BDO, Deloitte Touche, Ernst & Young, KPMG and PwC with 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 US markets.

According to the SEC’s order instituting the proceedings, SEC investigators have been making efforts for the past several months to obtain documents from these firms. The audit materials are being sought as part of SEC investigations into potential wrongdoing by nine China-based companies whose securities are publicly traded in the US, but the audit firms, the SEC alleges, have refused to cooperate in the investigations.

In fact, access to company records can be being severely restricted by local Chinese authorities, and the accounting firms have cited this problem for being unable to release their records.

"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," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions."

An administrative law judge will schedule a hearing and determine the appropriate remedial sanction 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.

Furthermore, the SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers. Through the work of a Cross Border Working Group, the agency has deregistered the securities of nearly 50 companies and filed fraud cases involving more than 40 foreign issuers and executives.

The SEC’s Enforcement Division has already taken a series of actions against China-based audit firms. Earlier this year, for example, the SEC announced an administrative proceeding against Shanghai-based Deloitte Touche Tomatsu for refusing to produce documents for an SEC investigation into one of its China-based clients. That proceeding is on-going.

“US investors should be able to rely on the quality of audited financial statements,” said Kara Brockmeyer, co-head of the SEC’s Cross Border Working Group. “Our Working Group’s actions demonstrate how the SEC is proactively identifying emerging risks to protect US investors from accounting fraud.”

TAGS: court | investment | law | accounting | equity investment | audit | China | enforcement | stock exchanges | United States | regulation

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