U.S. SEC says audit firms hinder accounting fraud probes at U.S.-listed Chinese firms

U.S. SEC says audit firms hinder accounting fraud probes

Mon, Jul 8 2013

By Sarah N. Lynch

WASHINGTON, July 8 (Reuters) – U.S. federal regulators tried to persuade a judge on Monday to sanction the Chinese arms of the world’s top five accounting firms, saying their refusal to hand over audit work papers has hindered investigations into fraud at U.S.-listed Chinese firms.

In testimony during a hearing at the U.S. Securities and Exchange Commission, an SEC official alleged that Deloitte Touche Tohmatsu LLP’s failure to turn over audit records has stalled a three-year-old probe into financial fraud at a large solar power company.“We’ve had significant delays,” said Laura Josephs, an SEC assistant enforcement director.

She added that Deloitte was “continuing to issue audit opinions” both for that company and others, even while it failed to comply with the SEC’s request.

In December, the SEC charged the Chinese affiliates of Deloitte, KPMG, PricewaterhouseCoopers , BDO and Ernst & Young with securities violations.

The case, which kicked off Monday in an administrative trial expected to last several weeks, is the SEC’s most aggressive effort to date in its regulatory standoff over access to Chinese audit papers.

The United States wants greater oversight after a rash of accounting scandals at U.S.-listed companies based in China have damaged investor confidence.

The SEC is seeking to have the firms’ right to practice before the agency suspended – a sanction that could effectively force their U.S.-listed clients to de-list.

CHINA’S SECRECY LAWS INVOKED

The firms argue that they cannot comply with the SEC’s request to hand over the audit papers because China’s secrecy laws forbid it.

The SEC had previously tried to work things out with Chinese regulators through negotiations, but filed the case against the accounting firms after talks broke down.

Much of the questioning in Monday’s hearing focused specifically on Deloitte’s audit work for the solar power company, which is referred to in the SEC’s complaint as “Client A.”

But exhibits displayed in the courtroom on Monday revealed Client A’s identity as Canadian Solar, which still trades on the Nasdaq and first disclosed the SEC’s investigation in 2010.

A spokesman for the company did not return a call or e-mail seeking comment.

A second mystery client, “Client C,” was also identified in court by an Ernst and Young attorney on Monday as the firm Sinotech Energy Ltd., which was sued by the SEC last year and later reached a settlement.

In her testimony, Josephs downplayed the audit firms’ claims that Chinese secrecy laws prevent the sharing of documents, saying the agency still managed to get documents from “Client A” upon request.

But Michael Warden, an attorney representing Deloitte, argued that his client and the other audit firms are not violating federal securities laws because their failure to share the documents is not a “willful refusal.”

He added that Deloitte willingly turned over 19 boxes worth of audit papers for Canadian Solar to Chinese regulators shortly after the SEC made its request.

So far, Chinese regulators have not shared those documents with the SEC.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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