WASHINGTON (Legal Newsline) - Chinese affiliates of the Big Four accounting firms and another large U.S. accounting firm have refused to produce documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.
Announced Dec. 3, the SEC began administrative proceedings and charged five firms with violating the Securities Exchange Act and the Sabanes-Oxley Act, which requires foreign public accounting firms to provide the SEC with audit paperwork upon request.
The firms being charged by the SEC are DBO 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.
For the past several months SEC investigators have been at work to obtain documents from these firms, according to the SEC's order instituting the proceedings. The audit firms have refused to cooperate in the investigation.
A hearing will be scheduled with an administrative law judge to determine the appropriate remedial sanction against the firms. This must be done within 300 days from the date of service of the order.
To address concerns from reverse mergers and foreign issuers, the SEC has begun an initiative through the work of a Cross Border Working Group. The agency has deregistered the securities of nearly 50 foreign issuers and executives and filed fraud cases involving more than 40 foreign issuers and executives.
"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 said, Director of the SEC's Division of Enforcement. "Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions."
The enforcement division of the SEC has taken action against China-based audit firms including the announcement of an administrative proceeding against Shanghai-based Delotte Touche Tomatus for refusing to produce documents for an investigation earlier this year. The proceeding is ongoing.