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SEC Sues Chinese Affiliates of Five Audit Firms; Clashes with China Regulator

12-04 11:10 Caijing
Ihe charge highlights clashing between SEC and China's regulator over the sharing of audit information as SEC probes into a series of accounting frauds at Chinese companies traded in the U.S.

The US Securities and Exchange Commission(SEC) has charged the Chinese affiliates of five leading accounting firms with violating securities laws for refusing to produce paperwork related to investigations into accounting frauds at U.S.-listed Chinese companies.

The charge highlights clashing between SEC and China's regulator over the sharing of audit information as SEC probed into a series of accounting frauds at Chinese companies traded in the U.S. which had left Chinese companies at depth of a confidence crisis.

The SEC said in Monday’s document that those firms violated two U.S. acts, which require foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on U.S. 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,” said Robert Khuzami, 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,” Khuzami added.

However, Deloitte said that Chinese laws prevented it from disclosing information about its clients after it was charged by the SEC in May for refusing to produce documents for an SEC investigation into one of its China-based clients, which put the firm in a dilemma.

China’s Ministry of Finance said in regulations that the big audit companies — Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG — must “localize” their staff in line with laws that specify the qualifications, ages and experience of their management.

China’s Ministry of Finance in an earlier planning this year required Sino-foreign cooperative accounting firms to localize their operations and hire more Chinese citizens to manage domestic affairs.

U.S.-listed Chinese companies have been involved in a string of accounting frauds as over 20 Chinese companies have been delisted or halted trading so far this year. 

The five charged affiliates are 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.

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