Dec 20, 2012 01:55 PM

Auditing Spat Dividing U.S. and China Turns Ugly


(Washington) -- The latest twist in a long-running dispute between Beijing and Washington securities regulators over Chinese audits is threatening to boot Chinese companies from America stock exchanges.

The plot thickened on December 3 when the U.S. Securities and Exchange Commission announced administrative proceedings against the Chinese affiliates of five global accounting firms working for nine U.S.-traded Chinese companies suspected of financial fraud.

SEC charged the Chinese divisions of Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers and BDO with violating the U.S. Securities Exchange Act and the Sarbanes-Oxley Act by refusing to turn over to SEC working papers attached to the targeted companies' audits.

The auditing firms have claimed their hands are tied: Turning over a Chinese company's audit papers to the SEC or any other foreign entity would violate China's law and regulations.

Debates over conflicting Chinese and U.S. auditing rules have for years embroiled not only the SEC and auditing firms, but also China Securities Regulatory Commission (CSRC) and an industry group called the U.S. Public Company Accounting Oversight Board (PCAOB).

The SEC apparently gave the firms the December ultimatum after losing patience with the progress of negotiations with the CSRC over access to Chinese company audits, according to Albert Arevalo, the SEC's assistant director for international affairs.

Testifying recently at an administrative law hearing, Arevalo said that since 2009 the SEC had asked CSRC to cooperate with audit probes 21 times. In three requests, U.S. regulators asked their Chinese counterparts for access to audit working papers. But never once, he said, did CSRC provide "substantial" assistance.

SEC says its investigators need audits before deciding whether to press charges against U.S.-listed companies accused of defrauding investors.

"Only with access to the working papers of foreign public accounting firms can the SEC test the quality of underlying audits and protect investors from the dangers of accounting fraud," said the commission's enforcement director, Robert Khuzami.

Khuzami did not name the nine Chinese companies currently under SEC investigation whose audits remain off-limits to anyone off the mainland.

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