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China royal mess: big 4 settle SEC complaint

4 Accounting Firms’ China Affiliates Agree to S.E.C. Settlement

By William Alden February 6, 2015 1:10 pm NY Times

The Chinese affiliates of the Big Four accounting firms have agreed to pay a combined $2 million as part of a settlement with the Securities and Exchange Commission over their failure to produce documents from their audits of Chinese companies under investigation by the agency.

The Chinese accounting firms — affiliates of Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers — agreed to pay $500,000 each and take certain steps to satisfy future document requests by the S.E.C., the agency said on Friday.

But the S.E.C. stopped short of suspending the firms from auditing Chinese companies listed in the United States. Last year, an S.E.C. administrative law judge called for a six-month suspension from such work.

The four firms on Friday did not admit or deny the S.E.C.’s contention that they violated securities laws. But they acknowledged that they did not hand over the documents before the S.E.C. brought charges against them in 2012.

“As we repeatedly have stated throughout this litigation, obtaining an audit firm’s work papers is critical to enforcement staff’s ability adequately to protect investors from the dangers of accounting fraud,” Andrew Ceresney, the director of the S.E.C’s enforcement division, said in a statement.

In a joint statement, the four Chinese firms said they were “pleased” to have reached the settlement and added that their “ability to continue to serve all their respective clients is not affected by this settlement.”

In a separate statement, Ernst & Young said it was “pleased this matter has been resolved given the potential for significant harm to investors and the global capital markets of further proceedings.”

The settlement resolved a yearslong dispute that stemmed from the S.E.C.’s investigating possible fraud at Chinese companies that had gone public in the United States. The S.E.C. said in late 2012 that the companies’ auditors had refused to hand over relevant paperwork and that they could face sanctions.

The firms countered that handing over the documents could violate Chinese secrecy laws.

But in early 2014, the administrative law judge, who is independent of the S.E.C., censured the Chinese affiliates of the four firms and called for the six-month suspension. Accounting experts have since said that such a suspension could have broad consequences and complicate the audits of American firms that do business in China.

As part of the deal announced on Friday, the S.E.C. gained a few important levers it can pull if the Chinese firms fail to meet future requests for documents. Among these are the ability to impose a six-month bar on certain audit work and the right to restart the administrative proceedings.

“The settlement is an important milestone in the S.E.C.’s ability to obtain documents from China,” Antonia Chion, associate director of the S.E.C.’s enforcement division, said in a statement. “Of course, we hope that it is an enduring milestone.”