The SEC has accused affiliates of all Big Four audit firms, plus BDO, of withholding documents related to at least nine companies in China that are under investigation for possible accounting fraud against US investors.
The SEC has charged BDO China Dahua, Deloitte Touche Tohmatsu Certified Public Accountants, Ernst & Young Hua Ming, KPMG Huazhen and PwC Zhong Tian with violating the Securities Exchange Act and SOX rules that oblige foreign accounting firms to give the SEC audit work papers for any company trading on US markets.
‘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,’ says Robert Khuzami, director of the SEC’s division of enforcement, in a statement. ‘Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions.’
Investigators have been trying for ‘the past several months’ to get documents from the five firms accused as part of investigations into alleged fraud by nine companies that are based in China but trade on US markets, the SEC notes. The commission says the five audit firms have refused to co-operate with the investigations, but does not name the nine China-based companies.
As the next step in the case, an administrative law judge must schedule a hearing to determine whether to impose any sanctions on the five firms. The judge has a maximum of 300 days to issue a decision, according to the SEC.
The charges against the five audit firms stem from an ongoing SEC campaign, in conjunction with the commission’s Cross Border Working Group, into reverse mergers and foreign issuers. As part of the campaign, the SEC says it has deregistered the securities of almost 50 companies and started fraud proceedings against more than 40 executives and foreign issuers.
In May this year, the SEC started proceedings against Deloitte Touche Tohmatsu in another case for refusing to provide audit work papers for a China-based company under investigation for alleged accounting fraud.
In another case in 2011, the SEC filed a subpoena enforcement action in federal court against Deloitte Touche Tohmatsu in relation to Longtop Financial Technologies, a China-based client since at least 2007. An administrative law judge found that Longtop was not meeting its reporting obligations and ordered the company’s securities registration to be revoked.
