Securities and Exchange Commission Seeks Audit Workpapers for Companies Whose Securities Are Publicly Traded in the U.S. and Whose Principal Operations are Based in China

On December 3, 2012, the Securities and Exchange Commission commenced administrative proceedings against the China affiliates of the Big Four accounting firms and another large accounting firm. Three of the affiliates are located in Beijing, and two of them are located in Shanghai. The administrative proceedings arise out of the alleged refusal by the China-based accounting firms to produce audit workpapers and other documents related to nine companies whose principal operations were based in China and whose securities are publicly traded in the U.S. The SEC is seeking the production of the audit workpapers and other documents as part of investigations into potential accounting fraud against U.S. investors.

The SEC alleges that the firms violated the Securities Exchange Act and the Sarbanes-Oxley Act. Sarbanes Oxley Act Section 106 applies, in part, to certain foreign public accounting firms that prepare or furnish an audit report with respect to an issuer of securities. Section 106(b)(1) addresses the production of audit workpapers by foreign public accounting firms and requires such firms to produce their audit workpapers and all other documents of the firm related to audit work to the Commission upon request. The SEC alleges that the firms have refused to provide the requested audit workpapers and other documents. As a result, the SEC is seeking a determination as to whether the foreign public accounting firms should be censured or precluded from appearing and practicing before the SEC.

In its press release on the administrative proceedings, the SEC states that it “has launched an initiative to address concerns arising from reverse mergers and foreign issuers. Through the work of a Cross Border Working Group, the agency has deregistered the securities of nearly 50 companies and filed fraud cases involving more than 40 foreign issuers and executives. The SEC’s Enforcement Division has taken a series of actions against China-based audit firms.” The press release quotes Kara Brockmeyer, co-head of the SEC’s Cross Border Working Group, as saying, “Our Working Group’s actions demonstrate how the SEC is proactively identifying emerging risks to protect U.S. investors from accounting fraud.”

The SEC press release and Order can be found here.