SEC Seeks Work Papers and Documentation on 9 China- Based Companies Under Investigation.

[ by Howard Haykin ]

The SEC ended a diplomatic stalemate with China affiliates of each of the Big Four accounting firms and the affiliate of a 5th large U.S. accounting firm - all of whom had reportedly refused to produce audit work papers and other documents pursuant to SEC investigation.  In each case, China-based companies are suspected of potential accounting fraud against U.S. investors. 

The SEC charged the following firms with violating the Securities Exchange Act and the Sarb-Ox 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:

• BDO China Dahua Co. Ltd
• Deloitte Touche Tohmatsu Certified Public Accountants Ltd
• Ernst & Young Hua Ming LLP
• KPMG Huazhen (Special General Partnership)
• PricewaterhouseCoopers Zhong Tian CPAs Limited

SEC: Audit firms have refused to cooperate in investigations.    SEC investigators have been trying for the past several months to obtain documents from these firms.  The audit materials sought are needed to complete SEC investigations into potential wrongdoings by 9 China-based companies whose securities are publicly traded in the U.S. 

“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.”   ---  Robert Khuzami, Director of the SEC’s Division of Enforcement.

A hearing will be held by an SEC administrative judge to determine the appropriate remedial sanction against the firms.  The administrative law judge is required to issue an initial decision no later than 300 days from the date of service of the order. 

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 taken a series of actions against China-based audit firms. Earlier this year, 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 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.

This 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.

For further details, go to:   [ SEC PR 12-249, 12/3/12 ]    [SEC Administrative Proceeding #3-15116].