Or you can read it direct from here.
U.S. Sues Big Firms Over China Audits
Securities regulators took aim at the Chinese affiliates of big global accounting firms Monday, after a wave of accounting debacles at publicly traded Chinese firms that led to billions of dollars of shareholder losses.
In the U.S., the Securities and Exchange Commission brought an administrative proceeding against five accounting firms, alleging they refused to hand over documents sought in investigations of alleged accounting frauds at nine Chinese companies.
In Canada, the top securities regulator accused Ernst & Young's Canadian affiliate of missing problems during its audit on Sino-Forest Corp., a timber company that filed for bankruptcy protection this year amid questions about its disclosures.
The accounting firm agreed to pay 117 million Canadian dollars ($117.8 million) to settle separate shareholder allegations that it misled Sino-Forest investors. The settlement disclosed Monday was the largest ever by an auditor in Canadian history, a plaintiff's attorney said. Ernst & Young didn't admit wrongdoing in the settlement, which must still be approved by the bankruptcy court.
Dozens of Chinese companies have raised billions of dollars in the past decade listing their shares on U.S. and Canadian exchanges, before their share prices plummeted amid questions about their bookkeeping and disclosures.
The SEC action, if an administrative law judge rules in its favor, could lead to the Big Four's Chinese affiliates being barred from auditing U.S.-traded companies—something that could complicate the audits of multinational companies doing business in China. The regulatory moves also stand to heighten a U.S.-China confrontation over how much U.S. officials can do to ensure that Chinese audit firms adhere to U.S. regulatory standards.
"It definitely is ratcheting up the pressure another notch," said Jack Ciesielski, publisher of the Analyst's Accounting Observer.
Chinese audit clients paid the local affiliates of the Big Four $175.2 million in fees in fiscal 2011, according to figures compiled by Audit Analytics, a consulting firm.
U.S. regulators have attempted to investigate alleged fraud at some Chinese companies, and the SEC has filed several lawsuits. But they have been unable to get information from the China-based firms that audit many of these companies, including Chinese affiliates of the Big Four—Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG.
SEC Commissioner Luis Aguilar said in a speech Monday that the agency is investigating "accounting irregularities at dozens of China-based companies that are publicly traded in the United States," and that some of the probes "have been hampered by the lack of access to relevant documents."
The SEC maintains that firms that audit U.S.-traded companies have to follow U.S. law, and the Sarbanes-Oxley Act requires foreign audit firms to hand over documents about U.S.-listed clients at the SEC's request.
The firms counter that China's laws treat their auditing documents as akin to state secrets, and that their auditors could be thrown in jail if they turn the documents over to the SEC without permission.
"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 can," Deloitte said.
PricewaterhouseCoopers said its Chinese affiliate "has cooperated with the SEC at every opportunity, but "PwC China will, and must, comply with its legal obligations under China law." The fact that the action is against all the major firms "demonstrates that this is a profession-wide issue, not unique to one firm," and should be resolved by negotiations between U.S. and Chinese regulators, PwC said.
KPMG's China affiliate said in a statement that it is "hopeful" that discussions between U.S. and Chinese regulators "will result in a positive diplomatic resolution" to the matter.
Ernst & Young Hua Ming said it "supports close working relationships" with regulators and that it hopes "an agreement can be reached between U.S. and Chinese regulators that will enable our compliance with all applicable laws and regulations."
The commission's administrative proceeding against the China affiliates of the big accounting firms, plus the China affiliate of second-tier firm BDO, alleges that they haven't handed over documents for nine of their Chinese audit clients who are under SEC investigation for potential fraud. The nine companies weren't identified.
BDO referred questions about the case to its Chinese affiliate, which hasn't commented.
The SEC had previously filed two cases against Deloitte's Chinese affiliate over the same issue, but Deloitte hasn't handed over the requested documents. One case has been suspended while the SEC attempts to negotiate with Chinese regulators, according to court documents.
An SEC administrative law judge will hear the commission's cases against the China-based accounting firms. If the judge decides against the firms, they could be suspended from seeking new U.S.-traded clients, or even blocked entirely from auditing U.S.-traded companies.
In the Canadian case, the Ontario Securities Commission alleges Ernst & Young didn't exercise enough skepticism in its audits of Sino-Forest to verify the ownership and existence of the company's most significant assets.
According to the commission, for instance, one Ernst & Young auditor in its Canadian affiliate acknowledged in an email to another auditor that the firm had no way of knowing that the trees the audit firm was inspecting were actually owned by Sino-Forest: "I believe they could show us trees anywhere and we would not know the difference." In addition, the commission said, several of Ernst & Young's senior partners at the affiliate involved in auditing Sino-Forest couldn't read or speak Chinese.
Ernst & Young's Canadian affiliate said it was "confident" its Sino-Forest work had met all standards and that the firm "did extensive audit work to verify ownership and existence of Sino-Forest's timber assets."
Ernst & Young said its settlement with shareholders "is without admission of liability" and "will reduce the uncertainty and future burden on our business, and allow us to focus on our people and our clients."
Sino-Forest was one of the largest forest-product companies listed in Canada when a report last year by U.S. short-seller Muddy Waters LLC alleged fraud at the company. Since then, the Ontario Securities Commission has started administrative proceedings against Sino-Forest, and several of its former executives already face allegations from the commission that they inflated timber purchases; the company is currently trying to restructure under bankruptcy protection. Sino-Forest last year conducted an internal investigation into the allegations, but executives have denied fraud.—Jean Eaglesham contributed to this article.