SEC Charges China Affiliates of Big Four Accounting Firms with Refusing to Produce Documents

The Securities and Exchange Commission (SEC) has charged China affiliates of each of the Big Four accounting firms and another large U.S. accounting firm with refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.

The SEC charged the five firms with failing to provide the SEC upon request with audit work papers involving any company trading on U.S. markets.

The charged firms were: BDO China Dahua Co. Ltd, Deloitte Touche Tohmatsu Certified Public Accountants Ltd, Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited.

BDO was represented by Deborah Meshulam of DLA Piper in Washington.

Deloitte was represented by Michael Warden of Sidley Austin in Washington.

Ernst & Young was represented by Richard Martin at Orrick, Herrington & Sutcliffe in New York.

KPMG was represented by Geoffrey Aranow of Bingham McCutchen in Washington.

And PwC was represented by Michael Flynn at Davis Polk & Wardwell in New York.

SEC 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 U.S.

The audit firms 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 SEC enforcement chief Robert Khuzami. “Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions.”

The SEC said that an administrative law judge will schedule a hearing and determine the appropriate remedial sanction against the firms.

The order requires the administrative law judge to issue an initial decision no later than 300 days from the date of service of the order.

The SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers.

Through the work of a Cross Border Working Group, the agency has deregistered the securities of nearly 50 companies and filed fraud cases against more than 40 foreign issuers and executives.

The SEC’s Enforcement Division has taken a series of actions against China-based audit firms.

Earlier this year, the SEC announced an enforcement action against Shanghai-based Deloitte Touche Tomatsu for refusing to produce documents for an SEC investigation into one of its China-based clients.

That proceeding is ongoing.

The SEC previously filed a subpoena enforcement action in federal court against the firm for failing to produce documents in response to a subpoena pertaining to its longtime client Longtop Financial Technologies Limited.

In the separate administrative proceeding against Longtop, an administrative law judge found that Longtop was delinquent in its reporting obligations and ordered Longtop’s securities registration to be revoked.

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