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SARBANES-OXLEY ACT-SEC Brings Action Against Chinese Affiliates of Global Accounting Firms for Failure to Produce Audit Work Papers

By Matthew Garza, J.D.

The SEC instituted administrative proceedings against the Chinese affiliates of five accounting firms for failing to produce audit work papers related to nine China-based companies under investigation by the SEC for potential accounting fraud. The companies under investigation were audited by the accounting firms in fiscal years ending in 2008 through 2011. The SEC press release on the matter noted that an SEC working group has focused on concerns arising from reverse mergers and foreign issuers, and has deregistered the securities of nearly 50 companies and brought fraud cases against more than 40 foreign issuers and executives. (In the Matter of BDO China Dahua CPA Co.; Ernst & Young Hua Ming LLP; KPMG Huazhen; Deloitte Touche Tohmatsu Certified Public Accountants Ltd.; PricewaterhouseCoopers Zhong Tian CPAs Limited, Dec. 3, 2012, Release No. 34-68335).

The firms, which included the "big four" and also BDO's Chinese affiliate, were charged under Sarbanes-Oxley Act Section 106, which established that any foreign public accounting firm that prepares or furnishes an audit report concerning an issuer is subject to the Sarbanes-Oxley Act and related SEC and board rules "in the same manner and to the same extent" as a U.S. accounting firm. The proceeding was brought pursuant to Rule 102(e)(1)(iii) of the Commission's Rules of Practice in order to determine if the firms should be censured or denied the privilege of appearing and practicing before the Commission for willful violation of Sarbanes-Oxley Section 106.

AccountingAuditing FraudManipulation SarbanesOxleyAct

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