The most probable reason why the auditor has been changed :
WSJ article:
December 27, 2012, 6:07 p.m. ET
U.S.-China Audit Spat May Spill Over
By MICHAEL RAPOPORT
As U.S. regulators and Chinese authorities spar over the right to oversee audits of companies in China, U.S. multinational firms like Sanmina Corp. could suffer collateral damage.
Sanmina, a San Jose, Calif., electronics maker, has major operations in China and is partly audited by KPMG Huazhen, which is one of five Chinese accounting companies facing legal action from the U.S. Securities and Exchange Commission over their refusal to turn over audit work papers. KPMG Huazhen is the Chinese affiliate of accounting giant KPMG.
If the SEC prevails, the firms could be banned from auditing dozens of Chinese companies listed on U.S. markets. An SEC victory also could affect U.S. multinationals like Apple Inc., Qualcomm Inc. and Kimberly-Clark Corp. that have major Chinese operations. Chinese affiliates of U.S. auditors often contribute to audits of multinationals, a practice that couldn't continue if the affiliates were banned. Without complete audited financial statements, a company can't sell securities or remain listed on U.S. exchanges.
"The consequences are monumental when it comes not only to Chinese companies but to Chinese subsidiaries of U.S.-based multinationals," said Jacob S. Frenkel, a former SEC enforcement attorney now at Shulman Rogers Gandal Pordy & Ecker in Potomac, Md.
Sanmina declined to comment. KPMG and the other audit firms have said they could be penalized under Chinese "state secrecy" laws if they hand over the documents, and urge that a solution be worked out between the SEC and the Chinese government.
"We remain hopeful that a positive resolution that ensures cooperation and an appropriate level of information sharing will be reached," KPMG said in a statement.
PricewaterhouseCoopers, another of the firms whose Chinese affiliate faces SEC action, said, "We continue to hope that the two governments will find a way to come to an understanding and resolve this issue given the potential implications to the capital markets if they don't."
Spokesmen for the three other firms—Ernst & Young, Deloitte Touche Tohmatsu and BDO—declined to comment. An SEC spokesman couldn't be reached.
The SEC filed an administrative proceeding this month against the five firms, saying they were violating U.S. law by refusing to cooperate. An SEC administrative law judge will hear the case and render a ruling by next September.
The judge could censure the firms or temporarily suspend them from seeking new audit clients. The potential penalty that has many observers concerned, though, is "deregistration"—revoking the firms' right to practice before the SEC and conduct audits of U.S.-traded companies.
Such an action would be unprecedented on this scale, and could result in millions of dollars in lost fees and disruption. The international accounting firms' affiliates in China and other countries are legally independent, and the Chinese affiliates have local legal obligations, so a firm's global organization couldn't simply step in to replace a Chinese affiliate barred from U.S. auditing.
Together, the five Chinese affiliates currently audit 126 U.S.-traded companies, according to data from the Public Company Accounting Oversight Board, the U.S. government's auditing regulator. Among them: Baidu Inc., the Chinese search-engine giant, which currently uses E&Y's Chinese member firm Ernst & Young Hua Ming as its auditor. Baidu is "watching the situation closely as it develops," said spokesman Kaiser Kuo.
Sanmina's primary auditor is KPMG's U.S. affiliate, but KPMG Huazhen played a "substantial role" in Sanmina's fiscal 2011 audit by auditing a Sanmina subsidiary, according to the Chinese audit firm's annual report filed with the PCAOB.
U.S. auditors of multinationals "generally" use their affiliates in other countries to assist with audits of the multinationals' operations in those countries, including China, said Martin Baumann, the PCAOB's chief auditor, though auditors and their clients usually don't disclose such arrangements. Those affiliates must be SEC-registered if they play a "substantial role" in the company's audit.
Other multinationals with major Chinese operations whose audits could be affected include Apple, which reported $22.8 billion in revenue from China in its fiscal year that ended in September, and Qualcomm, which had 42% of its total revenue from China. Apple, which is audited by Ernst & Young, and Qualcomm, audited by PwC, declined to comment.
Some Deloitte multinational clients, like Kimberly-Clark, suggest in filings that "member firms" and affiliates of Deloitte participate in their audits, though they don't specifically say whether Deloitte's Chinese affiliate is involved. Kimberly-Clark has manufacturing facilities in Beijing, Nanjing and Shanghai and says on its website that it is "devoted to maintaing a long-term development strategy in China." The company declined to comment on the SEC action.
Some say the potential ramifications could help bring about an agreement. "It's possible that the threat of disqualification will bring the Chinese regulators back to the bargaining table," said Peter Bresnan, an attorney at Simpson Thacher & Bartlett LLP and a former SEC deputy enforcement director.
Write to Michael Rapoport at Michael.Rapoport@dowjones.com
