US Federal regulators have charged the Chinese affiliates of five of the biggest US accounting firms with impeding the government’s investigation of Chinese companies by refusing to hand over documents.
The Securities and Exchange Commission said on Monday it has started proceedings against the Chinese affiliates of all so-called “Big Four” accounting firms — Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers (PwC) — and a fifth major firm, BDO.
Hundreds of Chinese companies trade on US stock exchanges. The SEC has been investigating many of them for possible accounting fraud.
The agency says the accounting firms, which audit Chinese companies, have refused to cooperate in investigations of nine companies and to provide documents.
The Chinese affiliates of the firms, which are subject to Chinese law, say they cannot hand over the documents because the Chinese government will not allow them to do so, and could penalize them if they do.
The Chinese government maintains that providing the documents to US regulators would violate Chinese sovereignty and its secrecy laws.
In statements on Monday, some of the Chinese affiliates said they hoped the issue could be resolved in negotiations between Chinese and US authorities.
Ernst & Young Hua Ming LLP said: “We hope that an agreement can be reached between US and Chinese regulators that will enable our compliance with all applicable laws and regulations.”
“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,” Deloitte Touche Tohmatsu said in its statement.
PwC China said that it “has cooperated with the SEC at every opportunity,” but that it will, and must, comply with Chinese law.
Representatives for the affiliates of KPMG and BDO could not immediately be reached for comment.
SEC Enforcement Director Robert Khuzami said the agency needs to have access to the documents in order to verify the accuracy of the firms’ audits and protect investors from accounting fraud.
“Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions,” he said in a statement.
The SEC’s case against the firms’ affiliates will go before an administrative law judge at the agency. If the judge rules in favor of the SEC, the judge will determine what sanctions the affiliates could face.
In a related action on Monday, the Ontario Securities Commission in Canada accused Ernst & Young of failing to conduct its audits of troubled Chinese timberland company Sino-Forest Corp (嘉漢林業) in accordance with industry standards.
Ernst & Young denied the allegations and said it has been cooperating with the regulators.
Sino-Forest was once Canada’s most valuable publicly-traded forestry business, but shares plunged last year after short-seller Muddy Waters Research alleged the company exaggerated its assets.
The company filed for bankruptcy protection in March and put itself up for sale.