* PriceWaterhouseCoopers blames conflicting US, Chinese law
* Chinese affiliates of four other U.S. firms charged, too
* SEC had sought cooperation from Chinese officials
* Auditor watchdog PCAOB also negotiating with Chinese
By Aruna Viswanatha and Dena Aubin
WASHINGTON/NEW YORK, Dec 3 U.S. regulators on
Monday charged the Chinese arms of five top accounting firms
with securities violations over their refusal to produce certain
audit papers for U.S.-listed Chinese companies.
The Securities and Exchange Commission began proceedings
against the Chinese affiliates of Deloitte, KPMG,
PricewaterhouseCoopers, BDO and Ernst & Young. The agency on
Monday also moved to pursue a case they had put on hold against
It was the SEC's widest enforcement effort yet to procure
documents in connection with probes of possible accounting fraud
of U.S.-listed Chinese companies, and raised questions about
whether talks have stalled between the U.S. and Chinese
governments to resolve the issue.
The SEC said it has been seeking documents related to
investigations of possible wrongdoing at nine China-based
companies. Chinese secrecy laws have stymied efforts to obtain
audit documents that investigators need to determine whether
there were accounting irregularities.
An administrative law judge will schedule a hearing to
determine potential sanctions against the Chinese arms of the
accounting firms, the SEC said.
It was unclear whether the SEC's new posture will result in
financial penalties and discourage the firms from working with
certain Chinese companies, or if the move was designed to force
a breakthrough in the larger negotiations.
In July, the SEC disclosed it was in discussions with
Chinese regulators on cross-border cooperation, including access
to documents. The Monday action suggests those talks have not
progressed to the SEC's satisfaction.
"Firms that conduct audits knowing they cannot comply with
laws requiring access to these work papers face serious
sanctions," SEC enforcement director Robert Khuzami said in a
statement announcing the action.
The accounting firms pinned the blame on lack of progress in
"(The action) is the result of conflicting laws between the
U.S. and China," PwC China said in a statement. "This action
involves an issue that needs to be resolved between the US and
Deloitte said: "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
Ernst & Young's China affiliate, Ernst & Young Hua Ming,
said in a statement it hoped U.S. and Chinese regulators can
KPMG Huazhen's statement also stressed hope for an
agreement. "We remain hopeful that these on-going discussions
will result in a positive diplomatic resolution," it said.
BDO did not immediately respond to a request for comment.
Separately on Monday, Canada's top securities regulator said
it believes Ernst & Young breached the Ontario Securities Act in
its audits of Sino-Forest Corp, a China-focused
forestry company that collapsed under the weight of fraud
allegations. Ernst & Young Canada said in a statement that it is
confident its work "met all professional standards."
AUDITOR WATCHDOG ALSO NEGOTIATING
Top accounting firms operate as global networks of legally
separate member firms in each country, so all member firms are
not liable for the actions in any one country.
The SEC action accuses the affiliates of violating U.S.
securities laws that require foreign public accounting firms to
provide the SEC with audit work papers involving any company
trading on U.S. markets.
Many of the Chinese companies under investigation traded on
U.S. exchanges through so-called reverse mergers, and have since
been deregistered by the SEC.
Last year, the agency took Deloitte to federal court to try
to force that firm to turn over documents in connection with an
investigation into Longtop Financial Technologies Ltd.
In July, it sought a six-month delay in that legal battle,
citing negotiations with Chinese regulators.
But on Monday, the SEC said those negotiations ended
unsuccessfully and filed a motion to proceed with the case. It
also renewed efforts to get the documents related to Deloitte's
auditing of Longtop's financial statements.
Reuters reported last month that the U.S. auditor watchdog,
the Public Company Accounting Oversight Board (PCAOB), had
completed observations of Chinese inspections of auditors and
expressed optimism about talks over access to audit documents.
PCAOB spokeswoman Colleen Brennan said on Monday the agency
met with China regulators in Washington in the last week of
In a statement, PCAOB Chairman James Doty said his agency's
negotiations are proceeding on a separate track from the SEC.
If the agency's efforts do not lead to an agreement, "then
we will need to consider other alternatives," Doty said.