Regulators on Monday charged the Chinese arms of five top accounting firms with securities violations over their refusal to produce certain audit papers, raising questions about whether talks between the United States and China to resolve the issue have stalled.
The Securities and Exchange Commission began proceedings against the Chinese affiliates of Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young.
It was the SEC’s widest enforcement effort yet to procure documents in connection with probes of possible accounting fraud of U.S.-listed Chinese companies.
The SEC has been seeking documents related to investigations of possible wrongdoing at nine China-based companies, the agency said. Chinese secrecy laws have stymied efforts to obtain audit documents that investigators need to determine whether there were accounting irregularities.
An administrative law judge will schedule a hearing to determine potential sanctions against the Chinese arms of the accounting firms, the SEC said.
In July, the agency disclosed that it was in discussions with Chinese regulators on cross-border cooperation, including access to documents. The Monday action suggests that those talks have not progressed to the SEC’s satisfaction.
“Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions,” SEC enforcement director Robert Khuzami said in a statement announcing the action.
The accounting firms pinned the blame on lack of progress in the negotiations.
The action “is the result of conflicting laws between the U.S. and China,” PricewaterhouseCoopers China said in a statement. “This action involves an issue that needs to be resolved between the US and China.”
Deloitte said: “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.”
Ernst & Young’s China affiliate, Ernst & Young Hua Ming, said in a statement that it hoped U.S. and Chinese regulators can reach agreement.
The other firms did not immediately respond to requests for comment.
Top accounting firms operate as global networks of legally separate member firms in each country, so all member firms are not liable for the actions in any one country.
The SEC action accuses the affiliates of violating U.S. securities laws that require foreign public accounting firms to provide the SEC with audit work papers involving any company trading on U.S. markets.
Many of the Chinese companies under investigation traded on U.S. exchanges through “reverse mergers” and have since been deregistered by the SEC.
Last year, the agency took Deloitte to federal court to try to force that firm to turn over documents in connection with an investigation into Longtop Financial Technologies. In July, it sought a six-month delay in that legal battle, citing negotiations with Chinese regulators.