The Securities and Exchange Commission on Friday announced the deal with the Chinese arms of PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young. They each will pay a $500,000 penalty and take steps to provide documents to SEC investigators over the next four years. The deal resolves a dispute that pitted China's assertion of its sovereignty against efforts of U.S. regulators to crack down on corporate fraud and questionable accounting.
Hundreds of Chinese companies trade on U.S. stock exchanges, raising billions of dollars by selling shares to American investors since the late 1990s. The SEC has investigated at least two dozen of them for possible accounting fraud.
The SEC has been battling the four affiliates over their withholding of company audit documents from investigators. The firms, which are subject to Chinese law, insisted that law bars them from releasing the documents.
An administrative law judge at the SEC ruled in January 2014 that the Chinese-affiliated firms acted improperly when they withheld audit documents from investigators looking into possible fraud by Chinese companies trading on U.S. exchanges. The judge recommended that the Chinese-affiliated firms be suspended for six months from conducting the audits that U.S.-traded companies must submit in order to remain on American exchanges.
The accounting firms appealed the judge's decision. If no deal had been reached and his ruling had been upheld, it might have left dozens of Chinese companies with no way to provide audits required for their shares to be traded in the U.S. Major corporate names such as oil giant PetroChina, search engine Baidu and Alibaba — the e-commerce giant that went public last fall in the biggest IPO ever — could have been forced to find new auditors or withdraw from U.S. stock exchanges.
An exit from U.S. exchanges would leave small investors fewer options to profit from China's rapid growth.
Under the settlement, the four firms admitted that they did not produce documents before the SEC took legal action against them in 2012. They eventually began to provide them, the SEC said. The firms also were censured, bringing the possibility of a stiffer sanction if the alleged violation is repeated.
"Obtaining an audit firm's work papers is critical to (the SEC's) ability adequately to protect investors from the dangers of accounting fraud," SEC Enforcement Director Andrew Ceresney said in a statement.
The dispute highlighted the clash between Washington's anti-fraud efforts and Beijing's official secrecy despite its desire to profit from broader links with the 'global economy.
The fight began in 2012 after the SEC asked for "work papers," or corporate documents used by auditors to prepare financial reports, for nine U.S.-traded Chinese companies suspected of fraud.
In a separate dispute, Washington and Beijing have been wrangling for years over whether a U.S. accounting oversight panel created by a 2002 anti-fraud law can inspect Chinese auditing firms of U.S.-traded companies. The two sides announced a deal in May 2013 giving the U.S. panel access to audit documents. But the chairman of the panel, the Public Company Accounting Oversight Board, said that didn't replace the need to inspect auditing firms.
"We engage in active dialogue with Chinese authorities as we pursue an agreement on access," the PCAOB chairman, James Doty, said in remarks Wednesday at a public meeting of the SEC commissioners.
U.S. investors essentially have had to take Chinese companies' financial statements on faith. Investors in U.S.-traded Chinese stocks must often rely on audits that don't comply with U.S. law.
In a joint statement, the four Chinese affiliates said they were pleased to have reached the settlement with the SEC. "The firms' ability to continue to serve all their respective clients is not affected by this settlement," they said.
Separately, Ernst & Young said it was important to resolve the dispute because of the "potential for significant harm to investors and the global capital markets of further (legal) proceedings."
"We look forward to continued progress by the U.S. and Chinese regulators on all matters related to cross-border co-operation," the company said.Suggest a correction