Securities and Exchange Commission Charges 5 Accounting Firms in China

By Guo Min




On December 3rd, the Securities and Exchange Commission charged the Chinese affiliates of five big accounting firms: Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers — the so-called Big Four — and BDO, with violating Securities Exchange Act and Sarbanes-Oxley Act, claiming they failed to produce documents from their audits of several China-based companies under investigation for fraud. The agency said that it had been trying for months to obtain certain paperwork from the accounting firms. But the government said the auditors “refused to cooperate,” citing prohibitions in local law.



According to Robert Khuzami, the commission’s enforcement director, firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions, meaning that all accounting firms should know about the regulation. And this is not the first time that SEC has taken enforcement action against the firm for refusing to turn over documents in connection with a Chinese company under investigation. Deloitte (Shanghai) was sued by SEC in May, 2012, and SEC alleged that violated a provision in the 2002 Sarbanes-Oxley Act which requires foreign public accounting firms to provide their work papers.


So why would these accounting firms choose to refuse to provide paperwork? Actually, most of the accounting firms noted the difficulties of navigating the conflicting laws of the United States and China. The five accounting firms in China should follow both the regulation of SEC as well as the law in China. According to Archives Law and Privacy Act of China, Chinese accounting firms cannot directly provide documents to any foreign institutions without the Chinese Government’s permission, therefore, as an accounting firm regulated by Chinese Government, it would an action that violates the law if Deloitte or other firms provided paperwork to SEC.


Since Chinese and the US legal systems are different, and it seems that the difference would have a great impact on accounting firms in China, the two governments should establish an agreement towards Cross-border audit supervision, which may help to eliminate the conflict between two systems and the impact on Chinese accounting firms as soon as possible. And for Chinese Government, the issue would be more urgent because the action of SEC has caused credit crisis for Chinese companies, and if the conflict still exists, it would be a serious problem for the development of Chinese companies in the US.



“S.E.C. Charges 5 Firms Over Audits in China”. Retrieved December 4th, 2012


“UPDATE 5-US SEC charges China affiliates of top accounting firms”. Retrieved December 4th, 2012


“SEC charges Deloitte unit over audit work papers”. Retrieved December 4th, 2012


“SEC起诉德勤上海 中概股或遭新信任危机”. Retrieved December 4th, 2012




14 Responses to Securities and Exchange Commission Charges 5 Accounting Firms in China

  1. I completely agree with you and the relevant audit firms’ response to the charge. It is clear that this situation is the product of a larger conflict between US and China. The regulators are not progressing in their negotiations and as a result the harm has been inflicted on these firms that have no control over the situation. There is no winning for these auditors because they will face sanctions regardless of whether the working papers are handed over or not.

    This is an extremely pressing situation that affects the entire industry. Chinese firms seeking funds from US-capital markets will be forced to be unlisted, or will be disapproved for IPOs if these mainland affiliates are not allowed to practice. Such results are not only unfavorable for these Chinese firms, but for US investors as well. Although the SEC has made such charges to protect investors from potentially misleading financials, they have put these firms in an impossible situation that will not move the situation forward at all. In my opinion, such a move will not aid the negotiations at all because it will be considered as a sign of trespass on Chinese sovereignty. I believe these charges should be suspended immediately.

  2. Sun (2009087790) says:

    Apart from the case of Deloitte (Shanghai) being sued by SEC(US) in May 2012 and this recent case of five audit firms being sued by SEC(US) mentioned by you, I would like to share with you a similar case of Ernst & Young being sued by SFC(HK) in August 2012 for the same reason of refusing to submit the audit work papers for SFC(HK)’s investigation.

    Again, the reason why E&Y refused to disclose the audit work papers to SFC(HK) is that the disclosure goes against Mainland China’s Secrecy Laws. Actually the audit firm is put to a difficult position. If the audit firm agrees to give the audit work papers to SFC(HK), then it will be sued by the Chinese government for disclosing China’s state secrets because the client is a Chinese company and its financial information is regarded as China’s state secrets. On the other hand, if the audit firm refuses to give the audit work papers to SFC(HK), then it will be sued by SFC(HK) under Section 185 of the Securities and Futures Ordinance. It is a big headache to the audit firms partners!


    SFC commences legal proceedings against E&Y

    Section 185 of Securities and Futures Ordinance

  3. Marina Seidl (3035024691) says:

    First of all, I agree with Alice, writter of the first blog comment. Although I wonder about some approaches and methods conducted by the Chinese government, the country will lose its sovereignty when it makes legislatives amendments according to the laws of our “Superforce”, the United States.

    Regarding to the entire discussion, I want to highlight the conflict between PricewaterhouseCoopers and AutoChina because of the relevance according to our class. On the one hand, Auditors are acting for and on behalf of the shareholders and in their interest. But on the one hand, the economic incentives are initiated by the management. Thus, if auditors don’t perform referred to the executives the auditing company might lose a customer. As a result, they are in a dilemma.

    In this special case PricewaterhouseCoopers was dismissed as the auditor of AutoChina because PWC was concerned about some transactions which artificially blew up the company’s trading volume. This shows that the management has a great impact on the results of the auditing.

    Rapoport, M. (2012). SEC Files Suit Against Third Chinese Company. Retrieved Dec 06, from

  4. Chung Yuen Ling Candy (2010316720) says:

    The different and somewhat contradictory terms of Chinese and US rules had made the Chinese affiliates of the accounting firms to become a sandwich between the Chinese and US authorities; in which the compliance to one will lead to a violation to the other.

    Here I would like to share a Canadian case. In earlier this year in May, the Ontario Securities Commission accused Ernst and Young’s Canadian affiliate of insufficient auditing and failing to exercise professional skepticism when performing audit for Sino-Forest Corporation, which was one of the largest Chinese-based forest-product companies listed in Canada. Sino-Forest had later filed bankruptcy and Ernst and Young was alleged for misleading investors. Ernst and Young settled the allegations by paying a penalty of $117 million Canadian dollar, yet refused to admit wrongdoing.

    Having different laws in different sovereignties may enable better protection of domestic interest, however, this can also be the perfect breeding ground for frauds as they know the foreign regulations cannot touch them. With nowadays globalized economy and increasingly frequent cross-border business activities, international cooperation towards business crime investigation is necessary. Hopefully China and US can come up with a diplomatic resolution as soon as possible, so that the interest of worldwide investors can be guaranteed.

    “U.S. Sues Big Firms Over China Audits .”

  5. TONG, FUHAN (2010801177) says:

    Thanks for sharing. I think both political factors as well as law enforcement have significant impacts on the accounting firm operation. These impacts are not limited by borders, in the sense that accounting firms outside China, who provide services for Chinese listed companies, also face uneasy tensions. Example would be a case earlier this year in Hong Kong, when SFC filed a civil suit against the accounting firm Ernst & Young HK on 27 August 2012 as EY refused to provide the audit working papers related to its former China-based client Standard Water, claiming that they contain “state secrets” restricted by Chinese government.

    Listing practice of Chinese companies has short history and because of this Chinese government has laid down many unfair protection rules, yet these rules intensify conflicts of credible auditing information in global community. So, I do agree with you that it is high time Chinese financial regulatory authorities took further “open” reform in regulating the practice of auditing on public companies, particularly to eliminate the restriction of handing over work papers and not to use the out-of-date “state secret” as a reason anymore.

    SEC charges big accounting firms over audits in China. From:

    • Karen Wong (2010238083) says:

      Thank you for your insightful sharing on this breaking news for the accounting industry! I absolutely agree with the above comment that political factors have a significant impact in the operations of accounting firms, especially in China. The charges definitely reflected an enduring simmering conflict between the law and regulations of China and the States. The tension has left the accounting firms in an awkward position of ‘violating’ laws in both countries – the US for failing to share documents and in China for sharing them.

      In addition, upon my further research I realize that seems like dozens of Chinese-based businesses have raised money in the United States through so-called “reverse mergers”. These backdoor listings allowed companies to go public, yet not having to incur the usual soaring costs nor the regulatory examination of conventional offerings. Thereafter, investors who aim to capitalize on the growth in China would rush to buy the stocks. Yet when these companies gradually got examined closely, those investors would then lose their investment on the stocks. So far, SEC de-registered securities of almost 50 Chinese-based companies and had filed 40 related fraud cases. (Wyatt, 2012) Auditors then now have the regulators attention.


  6. Tang Chin Sin (2009229099) says:

    Thanks for your sharing. This case is very interesting and insightful for us as most of us will be working in the Big 4 involved in this case. I think the major issue in this case is the conflict between the laws of China and the U.S. It’s not like the Big 4 purposefully refused to provide the work papers because of fraud. Instead, they are bound by the law of China to keep these things secret.

    One possible solution to this case, as mentioned by our professor today, is that maybe the information can be released to the HK branches of Big 4 and SEC can then come over to Hong Kong to carry on their investigation. SEC could have asked for China’s government’s co-operation to allow them to come to China to do the investigation as well. Personally, I see no call for de-listing all the Chinese companies and it seems conspiratorial to me.

    SEC charges China affiliates of ‘Big 4′ accounting firms Retrieved on 7/12/2012 at

  7. Tsang Chiu Hiu (2010335972) says:

    Having had the partner interview in PricewaterhouseCoopers, I asked about this issue. The partner said that they can do nothing to improve the situation. As a private sector with a huge business in both sides, one is not recommended to state his political stance and support either one party. Being neutral as a third party is always beneficial to the company when there is conflict between countries. Also, he suggested that some international laws should be implemented to tackle with the contradiction between countries. Lastly, he claimed that the fines are kind of regarded as unavoidable expenses but the final amount will not be that huge as in reality, the US government knows their difficulties as well. It is just a warning from the US to CN through Big5.

  8. Chu Tsz Lok Agnes (2010033299) says:

    Thanks for sharing. I strongly agree you that there is a dilemma for the accounting firms as they are restricted by the Chinese law to provide documents of Chinese companies to foreign institutions. However, refusing the cooperation of SEC allows the existence of fraud and Chinese companies can flee from the investigation of SEC. Accounting firms then also fail to conform to the 2002 Sarbanes-Oxley Act.

    I think this is not necessary for China to amend its laws as it has total sovereignty over the country. However in order to uphold the justice and transparency in the market, it should at least cooperate with the SEC to allow investigation. Agreements can be signed for ensuring the privacy of the documents unless the Chinese companies are proved guilty. If China continues to over protect the Chinese companies, there would be an increasing number of foreign companies find China as a harbor for creating frauds.

  9. Hu Yiqi (2010802688) says:

    In my opinion, it reflects the conflicts between two different regimes, the democracy and the authoritarian, in which, like China, giant corporations have a national background, or say the main stakeholder of which is the government.

    Those enterprises, having the special characteristics for which can be described as state-owned, conduct the general business as well as “business” on behalf of the national interests. It is hard to tell or classify how much of its business fell in a pure commercial purpose and how much of them were for national use. For instance, U.S government sued Sany and Huawei for stealing military information in states, then they protected against for not did so but only conducted legal pure-commercial-purposed business. But who knows? And in China’s high monopolistic mobile and network market, how can you say the monopoly — China Mobile or China Union did 100% of their business commercially and have no network supporting for military or other special use. If they really have some, how could they be fool enough to reveal the service of those kinds or even the existence of the equipment for special use to another country, financially or in other forms.

    It should be the way that the business regulations can only begin to merge when the regimes or the ideology begins to show a sign of getting closer.


    Rachel Armstrong and Dena Aubin (2012). U.S. multinationals fear fallout from U.S.- China audit row. Retrieved Dec 9th 2012 from

    Adam Jones (2012). China and US in standoff over auditors. Retrieved Dec 9th 2012 from

  10. Wang Donglei (UID:2010801713) says:

    Thank you for sharing.

    Actually, the dispute has lasted for a long time. Last year, SEC has sued Shanghai Deloitte because the accounting firm refused to hand in audit working papers related to Longtop Financial Technologies Limited’s financial fraud. Deloitte replied that they cannot hand in because of related China laws.

    In my opinion, I agree with Deloitte that this issue is not only an accounting topic any more but a political issue instead. The Chinese companies listed in SEC should be bound by both laws in China and America. However, there are some gaps between the two countries’ law and some so-called confidential information cannot be disclosed as well. So, for accounting firms, there is a difficult position.

    The harm of such gaps is also obvious. If SEC wins, “Big Four” in China may need to drop from PCAOB, which will make companies listed and willing to be listed in SEC facing a situation where their financial statements cannot be audited. That will further hurt trade between China and America as well.

    As a result, to solve the problem thoroughly, government’s power is important.

    Paul.J.Davis. (2012, December 05). 审计纷争或引发赴美中概股退市潮. Retrieved December 09, 2012, from FT-Chinese:

    中国安邦集团研究总部. (2012, December 06). 中国审计监管风波需高层灭火.
    Retrieved December 09, 2012, from FT-Chinese:

  11. Li Si Tong (2010801141) says:

    Nice job! You updated breaking news in Chinese accounting industry. I agreed with you that the background or ultimate cause behind this issue is the difference between legal systems under this globalization trend. Also, I think that the final outcome would be conciliation between SEC and Chinese government. In my opinion, it is valid for SEC to request the submission of working papers from accounting firms in China. Due to loose regulation and popularity of improper accounting practice of China-based listed companies, those Chinese companies going public in the U.S. was usually found suspicious of revenue inflation and other misstatements or even fraud. In July of this year, New Orientation Education & Tech. Group Inc. (NYSE: EDU) was subject to an investigation conducted by SEC for the VIE reconstruction. In fact, the SEC said that there were about 50 companies deregistered, and more than 40 companies and executives were filed fraud. Submitting audit-working paper to SEC may have an effect on Chinese-based companies listed in the U.S. to strictly comply with accounting standards and pay more effort in information transparency.


  12. HO MAN LOK MARK (2009233686) says:

    Thank you for sharing the HOT news just few days ago! The conflict of legislative systems in different countries is really important should be solved as soon as possible.

    Any firms having their registered origin as China or having subsidiaries/ branches in China, they will face the same problem as the Big 5 accounting firms faced. China is fast growing in past two decades, and I understand that the Chinese government wants to protect and control everything within its territory and thus they tend to get rid of all uncontrollable factors and threats. In this case, the share of documents with foreign countries is treated as leaking China’s confidential information. I think China is doing too strict on Privacy Act of China, it is already 2012, China should release some of its control in order to follow the global trend, which is the disclosure of factual documents to allow free and unrestricted access and let the people decide what they want. If China does not change the Privacy Act of China, the Chinese firms now operating in foreign countries will not be welcome, which in turn brings serious consequences and losses to China itself.

    To conclude, the foreign security commission (not only USA) but also other countries, must communicate with Chinese officials to gain access to documents in China. In fact, It is innocent for the Chinese accounting companies running outside China, because they have to choose between breach of foreign law or Chinese law, in other words, they must lose once they have business in China. After sharing the information worldwide, the possibility of fraud will be reduced and this will benefit all investors in the world as this will bring series of positive effect to the economy.


  13. Samuel (2010571693) says:

    Thank you, Guo Min, for your insightful analysis regarding the concepts behind the potential conflicts of laws across nations relevant to the recent case involving these accounting firms. I completely agree with your analysis that this dilemma may involve significant consequences to the development of Chinese firms in the US.

    Having said this, I would also like to add to the discussion another perspective on how the legal structure of these firms may help reduce the potential effects on these firms. In class, we have discussed setting up a number of companies can help shield liability compared to setting up just one company. Similarly, many accounting firms with international branches set up different companies which may involve the form of limited liability partnerships (LLP). I believe that this is especially relevant here, as even if the US decides to sanction any of the Chinese branches, the US counterparts should remain safe. Indeed, I find that this example effectively emphasizes the importance of a secure legal corporate structure.

    Cornell Law School. “Limited Liability Partnership (LLP)” 2010. Web. 9 Dec. 2012.


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