SEC charges 5 firms’ China-based affiliates

WASHINGTON — The Securities and Exchange Commission charged the Chinese affiliates of five big accounting firms Monday with violating securities laws, claiming they failed to produce documents from their audits of several China-based companies under investigation for fraud.

The agency, which has been broadly investigating Chinese companies that have gone public in the United States, 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.

“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.’’


The accounting firms cited in the administrative proceedings by the SEC are the Chinese affiliates of Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers — the Big Four — and BDO. The agency did not name the firms’ Chinese clients.

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Most of the accounting firms said they were cooperating with regulatory authorities. But they noted the difficulties of navigating the conflicting laws of the United States and China.

The potential stakes are high. As part of the administrative proceedings, the accounting firms could face sanctions. Under the law, the government could prohibit them from practicing before the SEC on a temporary or permanent basis. In essence, that means their audits of publicly traded companies would not satisfy securities laws.

The actions by the SEC stem from a broader inquiry into Chinese companies listed on US exchanges.

In recent years, dozens of Chinese-based businesses have raised money in the United States through ‘‘reverse mergers.’’ Such backdoor listings allowed companies to go public without the high costs and regulatory scrutiny of traditional offerings. Investors, looking to capitalize on the growth in China, rushed to buy the stocks.


But such companies have been the subject of increased scrutiny, and investors have lost billions of dollars on the stocks. The SEC has deregistered the securities of nearly 50 Chinese-based companies and has filed 40 related fraud cases.