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December 4, 2012updated 29 Apr 2022 7:27am

SEC steps up China audit work paper dispute

The US Securities and Exchange Commission (SEC) has began administrative procedures against all Big Four firms in China, as well as BDO China, for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against US investors.

The SEC charged BDO China Dahua, Deloitte Touche Tohmatsu Certified Public Accountants, Ernst & Young Hua Ming, KPMG Huazhen (Special General Partnership) and PricewaterhouseCoopers Zhong Tian CPAs with violating the SEC act and the Sarbanes-Oxley Act.

The SEC and Sarbanes-Oxley Act require foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on US markets.

Earlier in the year SEC began such proceedings against Deloitte, however dropped the order later on.

In the past, accounting firms have said they are unable to provide such documents, as by doing so they would be violating Chinese secrecy rules.

Deloitte said in a statement that the SEC’s proceedings confirm that the issue of document release by Chinese accounting firms to foreign regulators is a matter that needs to be resolved on a profession-wide basis.

“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,” Deloitte said. The SEC and the Chinese government have failed to agree on putting mutual inspections in place with negotiation said to be taking place.

The SEC said its investigators have been making efforts for the past several months to obtain documents from these firms. 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 and the audit firms are said to have refused to cooperate in the investigations.

“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 the SEC’s enforcement division.

An administrative law judge will schedule a hearing and determine the appropriate remedial sanction against the firms. The administrative law judge has to issue an initial decision no later than 300 days from the date of service of the order.

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