Watch out! A sovereign issue between US and China is trickling down as heartburn between the SEC and the Big Four Firms.
Yes! Yesterday, the Securities and Exchange Commission announced charges against the Chinese affiliates of the Big Four U.S. accounting firms.
PricewaterhouseCoopers Zhong Tian
Ernst & Young Hua Ming
Deloitte Touche Tohmatsu
BDO China Dahua Co. Ltd.
All these are being charged for refusing to deliver auditing workpapers related to Chinese firms that trade on US stock markets in relation to the notorious “reverse mergers” and consequent delistings done by many Chinese publicly traded stocks with apparently notional OK from their audit firms.
SEC has been trying for seveal months to get these docs for nine China-based companies under investigation for potential wrongdoing.
Robert Khuzami, director of the SEC’s enforcement division, wws quite straightforward,
“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.”
And what the are Big Four doing. They are ducking behind conflicting rules in China and the United States. Under local Chinese laws, Deloitte spokeswoman Lauren Mistretta pointed out.”accounting firms in China are not permitted to produce documents, including audit work papers, directly to any foreign regulator without Chinese government approval, so all firms in China have been unable to produce documents requested by the SEC.”
Chinese law bans the removal offshore of audit papers, while foreign regulators aren’t allowed to work inside the country’s borders.
“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, and we stand ready to assist that effort in any way we can,” she added.
PricewaterhouseCoopers-China echoed, “involves an issue that needs to be resolved between the U.S. and China.”
Ernst & Young Hua Ming hoped for “an agreement can be reached between U.S. and Chinese regulators that will enable our compliance with all applicable laws and regulations.”
KPMG China is “hopeful” that discussions between U.S. and Chinese regulators “will result in a positive diplomatic resolution” to the matter.
Next step – Over the next few months, a SEC administrative law judge will decide on cases against the Big Four, and if the judge decides against the firms, they could be suspended from seeking new U.S.-traded clients, or even blocked entirely from auditing U.S.-traded companies.
Folks, we are in the midst of a historic face-off between US regulators, US Big Four Accounting firms, and local laws in the US and China. This promises to be full of fireworks, and we will be watching!