SEC, Big 4 Firms Make Progress in China Audit Dispute; Hunt for fraud at mainland firms made harder by China’s secrecy laws

SEC, Big 4 Firms Make Progress in China Audit Dispute

Both Sides Say ‘Significant Time’ Needed to Discuss Potential Settlement


Dec. 15, 2014 6:12 p.m. ET

U.S. regulators and the Chinese affiliates of the Big Four accounting firms have made “substantial progress” toward settling their dispute over access to the firms’ audit documents, the two sides said Monday.

But Securities and Exchange Commission enforcement officials and the Chinese affiliates of the Big Four firms—PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG—say that while their progress toward a settlement has “increased significantly,” they still need “significant time and care” to discuss the potential pact, according to an order in the SEC’s administrative proceeding against the firms.

The discussions involve audit documents the SEC had sought from U.S.-traded Chinese clients of the Big Four accounting firms’ China-based affiliates. The order didn’t give any details about the prospective terms of a settlement, which the two sides have been discussing since June, or when it might be completed.

The SEC had demanded documents from the firms to assist its investigations of some of their U.S.-traded Chinese clients, but the firms refused to turn over the documents, citing strict Chinese laws that treat such documents as akin to “state secrets.”

In January, an SEC administrative law judge ruled the firms had violated U.S. law and ordered them suspended from auditing U.S.-traded companies for six months. The suspension is on hold while the firms appeal the judge’s ruling to the five-member SEC.

If imposed, a suspension could leave dozens of Chinese companies without auditors and complicate the audits of some U.S.-based multinational companies with major operations in China.

To allow the settlement talks to continue, the SEC granted a request by the Big Four firms and the SEC enforcers for another 70 days before legal briefs on the appeal will be due. The two sides’ briefs, which were due later this week, will now be due Feb. 26. The extension of time is the third since the settlement talks began, and both sides in the order said it is expected to be the last.

China Auditors See Settlement Nearing in Standoff With SEC

By Alan Katz – Dec 15, 2014

U.S. regulators and Chinese affiliates of the four largest accounting companies said they can probably reach an agreement within a few months to end a standoff over access to audit documents belonging to the firms’ clients.

Representatives of the U.S. Securities and Exchange Commission and the four firms said they don’t expect to need more than 70 additional days for settlement talks, according to an administrative order posted on the agency’s website.

Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. are appealing an administrative judge’s January decision to bar them from leading audits of companies traded in the U.S. after failing to provide documents at the heart of accounting-fraud probes.

The SEC filed an administrative action against the auditors in 2012 after struggling for years to obtain information for dozens of probes of China-based companies.

After an agreement in May 2013 between the two countries allowed some information to be shared, the accounting firms argued, unsuccessfully, that the SEC was getting what it needed and that the case jeopardized the listings of hundreds of Chinese companies trading in the U.S.

The order on the SEC’s website says that the agency and firms agreed that “substantial progress already made towards settlement has increased significantly.” They said they expect their request for a 70-day extension of the administrative case to be their last.

To contact the reporter on this story: Alan Katz in Washington at

Hunt for fraud at mainland firms made harder by China’s secrecy laws

Monday, 08 September, 2014, 4:12am

Toh Han Shih

Short sellers step up claims against firms but corporate documents are now tougher to obtain

In the wake of recent fraud allegations against two firms listed in Hong Kong, analysts expect to see more such claims from short sellers, but they say the task of exposing fraud among mainland companies is becoming increasingly difficult with China’s tough secrecy laws.

“It is not surprising we are seeing more cases of short sellers issuing reports on Chinese companies. There has been a trend of proven Chinese frauds since 2010 and we are likely to see more,” said Brian Fox, founding president of Capital Confirmation, a US provider of electronic auditing services.

Last week Anonymous Analytics, a group of anonymous analysts, issued a report alleging fraud at Tianhe Chemicals Group, a mainland chemicals firm, while Emerson Analytics, a group of equity analysts, issued a report alleging fraud by Shenguan Holdings Group, a mainland sausage casing maker. Both Hong Kong-listed firms issued brief denials of the allegations and threatened to sue their accusers for libel.

“Some people question the motives of the short sellers. However, because so many of the recent fraud reports issued by the major short sellers have proven accurate, it points to the larger fundamental issue; there are an abnormally large amount of Chinese companies listed on foreign stock exchanges looking to take advantage of investors,” said Fox.

However, it is becoming harder for short sellers to obtain corporate documents on the mainland, due to China’s increasingly tough secrecy laws which also cover corporate information, said governance activist David Webb.

Last month, Peter Humphrey, a British corporate investigator, and his American wife, Yu Yingzeng, were sentenced to jail by a Shanghai court for illegally obtaining private information. An article by Humphrey posted on his company’s website in May last year complained that access to corporate information on the mainland had become more difficult.

On August 22, the Securities and Futures Commission warned that sponsors of initial public offerings may be criminally liable for falsehoods published in prospectuses.

“There is an inherent conflict for underwriters and the Hong Kong stock exchange to find fault with the companies. They make money off IPOs,” said Dane Chamorro, Southeast Asia managing director of Control Risks, a risk consultancy based in Britain.

Webb recommended changes to Hong Kong’s system of sanctioning offerings, whereby the stock exchange approves the listing while the SFC exercises veto power. Instead, the SFC should be the only listing regulator, Webb urged.

Emerson Analytics has also issued fraud allegations against China Lumena New Materials Corp. The shares of both Shenguan and Lumena remain suspended.


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