SEC Sues “Big Four” Over China Audits
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The Securities and Exchange Commission on Monday charged the Chinese affiliates of the so-called “Big Four” accounting firms for allegedly failing to cooperate and provide audit data related to nine Chinese firms that are currently investigated for potential accounting fraud.
The Securities and Exchange Commission on Monday charged the Chinese affiliates of the so-called “Big Four” accounting firms for allegedly failing to cooperate and provide audit data related to nine Chinese firms that are currently investigated for potential accounting fraud.
According to the SEC, investigators have been trying for months to get the Chinese arms of all the Big Four audit firms — Deloitte Touche, Ernst & Young, KPMG and PricewaterhouseCooper – as well as accounting firm BDO’s China unit to turn over audit documents related to nine China-based firms that are publicly traded in the United States.
Regulators did not name the companies being investigated for potential accounting fraud.
Robert Khuzaimi, director of the SEC’s enforcement division, said:
[quote] 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. [/quote]
Monday’s action brings to a head a long-simmering conflict between US and Chinese laws.
The auditing firms say that tension has left them in a position of violating laws in both countries: In the US for failing to share documents and in China for violating state secrecy laws.
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“This action involves an issue that needs to be resolved between the US and China,” PwC China said in a statement.
Deloitte said it was unfortunate the two sides could not find common ground but said it remains “hopeful that a diplomatic agreement can be reached”.
Concerns are now growing that if no diplomatic solution is found, the the Chinese companies under investigation could be forced to delist from US stock exchanges and be banned from future listings.
To date 50 China-based companies have been delisted from US exchanges and the SEC has filed fraud allegations against more than 40 individuals or companies as part of its wide-ranging investigation into non-U.S. based firms.
Many of these firms entered the US capital market through reverse mergers, in which they acquire a US listed company, creating a public shell corporation while avoiding the scrutiny of a public offering exercise.
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