Federal regulators have charged the Chinese affiliates of five of the biggest U.S. accounting firms with impeding the government’s investigation of Chinese companies by refusing to turn over documents.
The Securities and Exchange Commission said Monday it has started proceedings against the Chinese affiliates of all so-called Big Four accounting firms — Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers — and a fifth major firm, BDO.
Hundreds of Chinese companies trade on U.S. stock exchanges. The SEC has been investigating many of them for possible accounting fraud. The agency says the accounting firms, which audit Chinese companies, have refused to cooperate in investigations of nine companies and to provide documents.
The Chinese affiliates of the firms, which are subject to Chinese law, say they cannot hand over the documents because the Chinese government won’t allow them to do so, and could penalize them if they do. The Chinese government maintains that providing the documents to U.S. regulators would violate Chinese sovereignty and its secrecy laws.
In statements Monday, some of the Chinese affiliates said they hoped the issue could be resolved in negotiations between Chinese and U.S. authorities, suggesting they were caught in the middle of a regulatory power struggle between Washington and Beijing.
Ernst & Young Hua Ming LLP said in a statement, “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.”
“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,” Deloitte Touche Tohmatsu said in its statement.
SEC Enforcement Director Robert Khuzami said the agency needs to have access to the documents in order to verify the accuracy of the firms’ audits and protect investors from accounting fraud.
“Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions,” he said in a statement.
The SEC’s case against the firms’ affiliates will go before an administrative law judge at the agency. If the judge rules in favor of the SEC, the judge will determine what sanctions the affiliates could face.
In a related action Monday, the Ontario Securities Commission in Canada accused Ernst & Young of failing to conduct its audits of troubled Chinese timberland company Sino-Forest Corp. in accordance with industry standards. Ernst & Young denied the allegations and said it has been cooperating with the regulators.
Sino-Forest was once Canada’s most valuable publicly-traded forestry business, but shares plunged last year after short-seller Muddy Waters Research said it suspected that the company exaggerated its assets. The company filed for bankruptcy protection in March and put itself up for sale.
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