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SEC Chases Five Major Firms for China Work Papers

Tammy Whitehouse | December 3, 2012

Tired of being denied audit work papers in China, the Securities and Exchange Commission has initiated administrative proceedings against affiliates of all Big Four firms and BDO for refusing to produce documents the SEC has pursued related to China-based companies that are under investigation for possible accounting fraud.

The SEC charged BDO China Dahua, Deloitte Touche Tohmatsu, Ernst & Young Hua Ming, KPMG Huazhen, and PricewaterhouseCoopers Zhong Tian with violating the Securities Exchange Act and Sarbanes-Oxley, which require foreign accounting firms to hand over audit work papers involving company trading in U.S. markets when the SEC requests them. The SEC says it has requested work papers and other documents for the past several months as it investigates nine China-based companies whose securities are traded in U.S. markets, but the audit firms have refused to hand over the requested paper work.

The SEC already filed charges earlier against Deloitte Touche Tohmatsu in connection with its investigation of accounting irregularities at Longtop Financial Technologies. Deloitte has resisted the SEC's demands citing Chinese law, which prohibits the release of audit work papers to agencies outside of China for fear of divulging state secrets. That case is ongoing, the SEC said.

The SEC said it has already deregistered the securities of nearly 50 companies and filed fraud charges against more than 40 issuers and executives as it seeks to address concerns about reverse mergers and foreign issuers. An administrative law judge will schedule a hearing, according to the SEC, to determine the appropriate sanctions.

“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,” Robert Khuzami, SEC director of enforcement, said in a statement. “Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions.”

Commissioner Luis Aguilar, speaking at a national accounting conference, said refusal on the part of companies and audit firms in China to hand over work papers and cooperate with investigations raises serious questions about whether companies should be allowed to trade their securities in the United States. He didn't discuss the latest action against five major firms, but said the SEC needs those work papers to conduct its investigations, and Sarbanes-Oxley requires firms to provide work papers upon request. “When we've made those requests in China, it's been an act of futility,” he said.