SEC Charges China Affiliates of Big Four Firms
The Securities and Exchange Commission said Monday it has begun administrative proceedings against the China affiliates of each of the Big Four accounting firms and another large U.S. accounting firm, BDO, for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.
The SEC charged BDO China Dahua Co. Ltd., Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership) and PricewaterhouseCoopers Zhong Tian CPAs Limited 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 U.S. markets.
PwC China attributed the SEC charges to a conflict between U.S. and Chinese laws. "Today’s action by the U.S. Securities and Exchange Commission is the result of conflicting laws between the U.S. and China," PwC China said in a statement. "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 US 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."
Ernst & Young's Chinese member firm said it hoped there would be a resolution between U.S. and Chinese regulators. "Ernst & Young Hua Ming supports close working relationships between regulators to enable them to cooperate and share information with one another," said Ernst & Young Hua Ming. "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."
KPMG Huazhen issued the following statement: "The U.S. and Chinese regulators have and continue to be in discussions aiming to build mutual understanding and cooperation on information sharing. We remain hopeful that these on-going discussions will result in a positive diplomatic resolution."
Deloitte said the issue needs to be resolved on a profession-wide basis. "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," the firm said in a statement. "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."
A spokesman for BDO USA said the firm would not comment on another BDO member firm.
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 U.S. The audit firms have refused to cooperate in the investigations.
“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 SEC’s Division of Enforcement director Robert Khuzami in a statement. “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.
The SEC said it 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 against more than 40 foreign issuers and executives. The SEC’s Enforcement Division has taken a series of actions against China-based audit firms.
Earlier this year, the SEC announced an enforcement action 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 ongoing.
The SEC previously filed a subpoena enforcement action in federal court against the firm for failing to produce documents in response to a subpoena pertaining to its longtime client Longtop Financial Technologies Limited. In the separate administrative proceeding against Longtop, an administrative law judge found that Longtop was delinquent in its reporting obligations and ordered Longtop’s securities registration to be revoked.
“U.S. 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 U.S. investors from accounting fraud.”
The enforcement action was coordinated by the Cross Border Working Group and involved investigative teams in SEC offices in Washington D.C., Boston, New York, Fort Worth, and Los Angeles.