The Securities and Exchange Commission (SEC) charged the affiliates of the top accounting firms in China with administrative proceedings after violating securities laws.
According to the SEC, Deloitte Touche Tohmatsu Certifies Public Accountants Ltd, Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), PricewaterhouseCoopers Zhong Tian CPAs Limited, and BDO China Dahua Co. Ltd refused to provide audit work papers and other related documents in connection with its investigation regarding the potential fraud committed by China-based companies against investors.
In a statement, Robert Khuzami, director of SEC’s Division of Enforcement 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.”
Khuzami emphasized that firms conducting audits that fail to comply with laws requiring access to audits works papers and other related documents would face serious sanctions.
According the complaint of the agency, the top accounting firms violated the Securities Exchange Act and the Sarbanes-Oxley Act, which mandate foreign public accounting firms to provide all the audit related documents requested by SEC involving any company that is trading on the U.S. markets.
Based on the complaint of the SEC, its investigators requested the audit documents involving nine companies in China from the accounting firms during the past several months, but they refused to cooperate with their investigation. The accounting firms argued that the law of the People’s Republic of China prohibits them from providing a copy of the requested documents.
The SEC is investigating the Chinese companies for their reverse merger practices in acquiring public companies in the United States, which allows them to create public shell corporations that are listed in the New York Stock Exchange or Nasdaq.
An Administrative Law Judge will schedule a hearing on the proceedings and determine appropriate sanctions against the accounting firms.
In a statement, Deloitte Touche Tohmatsu said, “ 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."
The SEC launched a probe to address the increasing concerns from reverse mergers and foreign issuers. The agency’s Cross Border Working Group already deregistered the securities and filed fraud complaints against 50 companies involving 40 foreign issuers and executives.
Kara Brockmeyer, co-head of the Cross Border Working Group of SEC said, “U.S. investors should be able to rely on the quality of audited financial statements. Our Working Group’s actions demonstrate how the SEC is proactively identifying emerging risks to protect U.S. investors from accounting fraud.”