Breaking: SEC Requests Big4 Firms Hand over Audits of Chinese Firms

By Michael Foster, Big4.com Blogger

The Securities and Exchange Commission has made a formal request to the Big4 auditing firms requesting that they ask the firms to hand over documents relating to audits of China-based companies listed on public exchanges in the United States.

The requests have gone to Deloitte, Ernst & Young, PwC, and KPMG over audits conducted by Chinese units of the firms.

The SEC has made informal requests for the documents before, and has charged Deloitte with violating American securities laws when the firm refused to hand over documents relating to a Chinese firm. In its defense, Deloitte has said that Chinese laws prohibit the firm from handing over documents in a move that could be punished in accordance with Chinese defense laws. The punishments include possible criminal charges that could see Deloitte auditors imprisoned in China.

The Big4 firms say that they are caught between American and Chinese laws in what is seen as an international diplomatic standoff. PwC said that it, “like other firms who have received similar requests, in dealing with them we are confronted by conflicting laws between the United States and China.”

Previously, Deloitte has said that it is caught in the middle of conflicting laws of two different governments,” adding that “accounting firms in China are not permitted to produce documents directly to any foreign regulator without Chinese government approval.”

Deloitte said that it was cooperating with both governments as best it could.

The SEC may seek further punitive action against the Big4 firms if they do not comply, such as deregistration. If deregistered, the firms could no longer audit companies in America.

Deloitte’s case is still pending in U.S. District Court.

Peking University professor of accounting Paul Gillis suggests that the Big4 firms may face the threat of no longer operating in America. “Without resolution, the only meaningful option… is for the PCAOB to deregister the (audit) firms and for the SEC to ban them from practice before the SEC,” he said.