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From Securities Regulation Daily, February 6, 2015

Big Four Chinese affiliates censured for failure to produce audit work papers

By Jacquelyn Lumb

The SEC today announced sanctions against four Chinese affiliates of Big Four accounting firms based on their refusal to turn over documents sought in investigations of potential fraud. Enforcement Director Andrew Ceresney said the settlement accomplished several key objectives. It preserves the substantial leverage that has been achieved in this matter by providing a four-year window in which the SEC can restart the proceedings in the event of noncompliance with requests for documents. It imposes appropriate sanctions for refusing to produce work papers—each firm was censured and agreed to pay $500,000. The settlement also establishes time frames and outlines the criteria that must be met for future SEC requests for documents. Ceresney characterized the settlement as a suspension rather than a dismissal of the proceedings.

The four firms named in the order are Deloitte Touche Tohmatsu Certified Public Accountants Limited, Ernst & Young Hua Ming LLP, KPMG Huazhen, and PricewaterhouseCoopers Zhong Tian CPAs Limited Company. In January 2014, an administrative law judge issued an initial decision which found that the firms willfully refused to provide the SEC with work papers and related documents in connection with their audits of nine China-based companies that had securities registered in the U.S. The firms had previously responded to the document requests that Chinese laws prevented them from producing responsive documents directly to the Division. After the hearing before the ALJ, the SEC received work papers from the firms with the assistance of the China Securities Regulatory Commission (CSRC).

Dodd-Frank Act requirement. Section 106(b)(1) of the Sarbanes-Oxley Act, as amended by the Dodd-Frank Act, states that if a foreign public accounting firm performs material services upon which a registered public accounting firm relies in the conduct of an audit or an interim review, issues an audit report, performs audit work, or conducts interim reviews, the firm must produce the audit work papers and all other documents related to the audit work or an interim review to the Commission or to the PCAOB upon their request.

Additional remedial measures. Under the terms of the settlement, if the firms fail to comply with future requests for documents, the SEC may pursue additional remedial measures, including a possible six-month bar on the firms’ performance of certain audit work, the commencement of a new proceeding, or the resumption of the current proceeding. The order includes a detailed framework for cooperation, which Ceresney said keeps the onus squarely on the firms.

Ceresney said the CRSC may play a role as a conduit for the future production of documents but the firms are ultimately responsible because they are registered with the PCAOB and they audit companies with securities that are registered in the U.S.

The release is No. 34-74271.

Companies: Deloitte Touche Tohmatsu Certified Public Accountants Limited; Ernst & Young Hua Ming LLP; KPMG Huazhen; PricewaterhouseCoopers Zhong Tian CPAs Limited Company

MainStory: TopStory AccountingAuditing DoddFrankAct

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