China Affiliates Of Big Four Accounting Firms To Settle SEC Charges For $500 Million

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The China-based accounting firms each agreed to pay $500 million to settle the SEC charges

The Securities and Exchange Commission (SEC) announced that the China-based affiliates of the big four accounting firms agreed to settle the sanctions imposed against them for refusing to submit documents related to investigations of potential fraud.

The accounting firms sanctioned by the SEC include Deloitte Touche Tohmatsu Certified Public Accountants Limited, Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited Company.

The firms are registered with the Public Company Accounting Oversight Board (PCAOB).

Settlement agreement

The China-based members of the big four accounting firms each agreed to pay $500 million as part of the settlement with SEC. The accounting firms also agreed to admit that they did not provide documents before the proceedings were initiated against them in 2012.

The SEC censured the accounting firms, which eventually started submitting documents related to its investigations. The commission also required the firms perform specific steps to satisfy its requests for similar materials over the next four years as part of the settlement.

The accounting firms agreed to the terms of the settlement without admitting or denying other findings stipulated in the SEC order.

The SEC retains authority to impose different remedial measures if the accounting firms fail to meet specified criteria regarding document productions in the future.

In 2012, the SEC filed an administrative complaint against the accounting firms for violating securities laws. The firms 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.

The accounting firms argued that China’s law prevents them from complying with demands of the SEC. The regulator is investigating concerns that fraud wiped out 61% of Chinese and Hong Kong stocks traded in the United States since 2011.

Judge ruling against the China-based accounting firms

According to the SEC, an administrative law judge issued an initial decision on January last year. The judge found that the accounting firms willfully violated Section 106 of the Sarbanes-Oxley Act. The law requires foreign public accounting firms to provide audit work papers and related documents requested by the SEC.

The accounting firms through the assistance if the China Securities Regulatory Commission (CSRC) submitted multiple productions of the document demanded by the SEC.

They also petitioned the SEC to review the initial decision of the judge on January 2014. The enforcement division of the SEC also requested a review of aspects of the decision.

Andrew Ceresnet, director of enforcement division of the SEC said, “As we repeatedly have stated throughout this litigation, obtaining an audit firm’s work paper is critical to enforcement staff’s ability adequately to protect investors from the dangers of accounting fraud.”

The SEC has an ongoing proceeding against the fifth China-based accounting firm, Dahua CPA Ltd.

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