Auditors' Chinese branches accused of breaking US law
By Feng Jianmin |
December 5, 2012, Wednesday
|
Print Edition
Print Edition
CHINESE branches of the world's five major accounting firms have been accused of breaking the law in the United States, renewing tensions in a regulatory standoff that may further chill the US-listing of Chinese firms.
The US Securities and Exchange Commission has begun proceedings against the Chinese affiliates of Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young over the companies' refusal to supply documents relating to audits of US-listed Chinese companies suspected of fraudulent behavior.
"The audit materials are being sought as part of SEC investigations into potential wrongdoing by nine China-based companies whose securities are publicly traded in the US," the commission said.
It is the largest action the SEC has taken so far in its efforts to force the handing over of the documents since China and the US securities regulator became entangled in negotiations over the inspection of US-listed Chinese firms.
Hundreds of Chinese companies trade on US 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 firms 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. The Chinese government maintains that providing the documents to US regulators would violate Chinese sovereignty and its secrecy laws.
"The action by the US Securities and Exchange Commission is the result of conflicting laws between the US and China," PricewaterhouseCoopers' Zhong Tian said in a statement yesterday. "PwC China has cooperated with the SEC at every opportunity. However, PwC China will, and must, comply with its legal obligations under China law."
Deloitte's Touche Tohmatsu said it was "unfortunate" the two countries could not find common ground but added: "We remain hopeful that a diplomatic agreement can be reached."
The Chinese branches of Ernst & Young and KPMG also said they still supported work between US and Chinese regulators toward sharing of information and mutual understanding.
BDO did not immediately respond to a request for comment.
Last year, the SEC took Deloitte to court to try to force it to turn over documents in connection with an investigation into China's Longtop Financial Technologies Ltd. In July, it sought a six-month delay in that legal battle, citing negotiations with Chinese regulators.
On Monday, the SEC said those talks had failed.
"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," said Robert Khuzami, director of its enforcement division.
"Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions."
The SEC said its enforcement arm has been cracking down on China-based audit firms as part of an initiative to "address concerns arising from reverse mergers and foreign issuers."
China-based companies listed on US exchanges have faced increased scrutiny over the past two years because of suspicions they were providing inaccurate financial statements to investors.
Only two companies have completed an initial public offering in the US so far this year, compared with 11 last year.
"The US market is almost frozen for Chinese IPOs this year," said Zhang Qi, a researcher with Zero2ipo.
"The trust of foreign investors in Chinese firms has yet to recover."
The US Securities and Exchange Commission has begun proceedings against the Chinese affiliates of Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young over the companies' refusal to supply documents relating to audits of US-listed Chinese companies suspected of fraudulent behavior.
"The audit materials are being sought as part of SEC investigations into potential wrongdoing by nine China-based companies whose securities are publicly traded in the US," the commission said.
It is the largest action the SEC has taken so far in its efforts to force the handing over of the documents since China and the US securities regulator became entangled in negotiations over the inspection of US-listed Chinese firms.
Hundreds of Chinese companies trade on US 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 firms 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. The Chinese government maintains that providing the documents to US regulators would violate Chinese sovereignty and its secrecy laws.
"The action by the US Securities and Exchange Commission is the result of conflicting laws between the US and China," PricewaterhouseCoopers' Zhong Tian said in a statement yesterday. "PwC China has cooperated with the SEC at every opportunity. However, PwC China will, and must, comply with its legal obligations under China law."
Deloitte's Touche Tohmatsu said it was "unfortunate" the two countries could not find common ground but added: "We remain hopeful that a diplomatic agreement can be reached."
The Chinese branches of Ernst & Young and KPMG also said they still supported work between US and Chinese regulators toward sharing of information and mutual understanding.
BDO did not immediately respond to a request for comment.
Last year, the SEC took Deloitte to court to try to force it to turn over documents in connection with an investigation into China's Longtop Financial Technologies Ltd. In July, it sought a six-month delay in that legal battle, citing negotiations with Chinese regulators.
On Monday, the SEC said those talks had failed.
"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," said Robert Khuzami, director of its enforcement division.
"Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions."
The SEC said its enforcement arm has been cracking down on China-based audit firms as part of an initiative to "address concerns arising from reverse mergers and foreign issuers."
China-based companies listed on US exchanges have faced increased scrutiny over the past two years because of suspicions they were providing inaccurate financial statements to investors.
Only two companies have completed an initial public offering in the US so far this year, compared with 11 last year.
"The US market is almost frozen for Chinese IPOs this year," said Zhang Qi, a researcher with Zero2ipo.
"The trust of foreign investors in Chinese firms has yet to recover."
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