China has been a thorny issue with the SEC and the PCAOB over the last couple of years. You see, there's been some concern that some Chinese companies have accessed U.S. markets through dubious means and then provided financial reporting and disclosures that weren't accurate in material respects. Audit firms charged with providing an opinion on the financial reporting said everything was right as rain, of course, until it wasn't.
Perhaps not wanting to come off too eager, the SEC simply said that it was aware that there was funny stuff going on with some of these Chinese companies' numbers and the audits of them, yet they didn't really do much else. Even Chinese officials admitted things weren't so great, but it's not like they were going to tell the SEC how to do their jobs. They were probably enjoying the dysfunction.
Today, however, the SEC did get around to sorta doing something, as they charged all of the Big 4 and BDO 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."
So, okay? They've tried this before charging Deloitte Shanghai with similar misbehavior although Deloitte simply said, "Just following Chinese law, guys," and things remain tied up in court until someone (probably the SEC) loses their patience and/or nerve.
But this time around, the Commission is trying to make a big splash, citing nine different clients of the five firms' audits that go back to 2009. They'd really like to look at the workpapers for these engagements, and under Sarbanes-Oxley Section 106 they have the legal right to, but the firms have managed to successfully stall by more or less ignoring the requests:
The SEC charged the following firms with violating the Securities Exchange Act and the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on U.S. markets:
- BDO China Dahua Co. Ltd
- Deloitte Touche Tohmatsu Certified Public Accountants Ltd
- Ernst & Young Hua Ming LLP
- KPMG Huazhen (Special General Partnership)
- PricewaterhouseCoopers Zhong Tian CPAs LimitedAccording to the SEC’s order instituting the proceedings, 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 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.”
On the one hand, I suppose the U.S. could de-register the firms that aren't cooperating, except that could make things very complicated for multi-national companies that engage those firms to audit their Chinese operations. That doesn't sound ideal, so it's nice that the SEC decided that they should probably show something for their trouble since, you know, enforcing securities law is what they do and this at least appears to be an attempt to do that. However, key things like, say, enforcement, can be a little bit trickier when firms are using "complying with Chinese law" as an excuse.
But it's not like the firms aren't hopeful!
“Ernst & Young Hua Ming supports close working relationships between regulators to enable them to cooperate and share information with one another,” Will White, director of global and EMEIA media relations for Ernst & Young, said in an e-mail statement. “We hope that an agreement can be reached between U.S. and Chinese regulators that will enable our compliance with all applicable laws and regulations.”
They don't mind sitting tight while the SEC and China continue their staring contest.