WASHINGTON — The Securities and Exchange Commission charged China-based affiliates of the five largest U.S. accounting firms on Monday with violating securities laws, saying that the firms failed to produce work papers from their audits of several China-based companies that are under SEC investigation.
In an administrative proceeding, the SEC said that the accounting firms refused to cooperate with the document request in part because the accountants “interpret the law of the People’s Republic of China as prohibiting" them from releasing the papers.
The nine Chinese companies under SEC investigation all have shares that are traded in the United States, making them subject to U.S. securities laws. The accounting firms under investigation by the SEC are the Chinese affiliates of Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers and BDO.
“Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the danger of accounting fraud," Robert Khuzami, the commission’s enforcement director, said in a statement.
“Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions," Khuzami said.
Among the possible sanctions is a sort of accounting death sentence: forbidding a firm from practicing before the SEC, meaning that the firm’s audits of publicly traded companies would not satisfy securities laws.