China Turns Over Corporate Audit Documents to U.S. Regulators

China Turns Over Corporate Audit Documents to U.S. Regulators

Move by Chinese Authorities Is Related to a Sweeping Probe of U.S.-traded Chinese Firms

MICHAEL RAPOPORT

Updated Dec. 13, 2013 1:06 p.m. ET

Chinese authorities have turned over more audit documents to U.S. regulators regarding U.S.-traded Chinese companies, audit firms disclosed in legal filings, part of a sweeping U.S. probe of suspected instances of accounting fraud. Audit documents regarding at least six Chinese companies trading on U.S. exchanges now have been either turned over to U.S. regulators or are “in the pipeline” to be furnished to the U.S., the audit firms said in filings in an administrative proceeding pending before the Securities and Exchange Commission.As recently as July, only one company’s documents were definitively known to have been turned over.

KPMG International, one of the Big Four accounting firms, disclosed Thursday that documents from at least one Chinese client had been turned over.

Other companies disclosed information between Nov. 20 and Dec. 3. Chinese authorities have turned over documents relating to one client of Ernst & Young’s Chinese affiliate, two clients of Deloitte Touche Tohmatsu’s Chinese arm and one client of KPMG’s Chinese affiliate, according to the filings, which were made by a group of five Chinese affiliates of major accounting firms. Documents relating to one client of PricewaterhouseCoopers in China and a second Ernst & Young client are in the pipeline to be given to the U.S., the filings said.

The SEC declined to comment. A spokeswoman for the Public Company Accounting Oversight Board, which regulates the U.S. audit industry, has said it received audit documents related to “more than one” enforcement investigation but declined to comment further. Chinese regulators couldn’t be reached for comment.

PricewaterhouseCoopers’ Chinese affiliate confirmed it had provided audit-related documents that will be turned over to U.S. regulators. Deloitte and Ernst & Young declined to comment. KPMG couldn’t immediately be reached for comment.

The document handovers stem from a deal earlier this year between U.S. and Chinese regulators that allows audit work papers from the Chinese companies’ China-based auditors to come to the U.S., funneled through the Chinese government. Auditors, investors and other observers have been watching to see whether the documents would help resolve a standoff over whether China would cooperate significantly in helping the U.S. scrutinize Chinese companies that trade on U.S. markets.

The standoff resulted from U.S. regulators’ efforts to probe a wave of accounting and disclosure problems at more than 100 U.S.-traded Chinese companies that surfaced starting in 2011. U.S. investors lost billions of dollars when the companies’ stocks plunged once the problems were disclosed. The SEC has filed more than a dozen lawsuits against some of these Chinese companies and their executives and has won settlements in some cases.

But the commission has been stymied in its efforts to investigate accounting issues at other Chinese companies, because the companies’ China-based audit firms, including Chinese affiliates of the Big Four, have balked at the SEC’s requests to hand over documents about their clients. The audit firms say they have resisted out of fear that providing the documents would violate China’s strict state-secrecy rules, which could land their auditors in jail.

Ultimately, that dispute led to the agreement earlier this year, which addressed the audit firms’ concerns by having them give the documents to Chinese regulators, who then would provide them to the U.S.

Jacob S. Frenkel, a former SEC enforcement attorney now in private practice, said the stalemate has been “unhealthy for the capital markets and companies that avail themselves of U.S. markets.” It is in the audit firms’ interest to accommodate the regulators, he said, and if the audit documents finally are being conveyed to regulators, that represents “progress.”

Still to be resolved is a parallel dispute over inspections of Chinese audit firms. The PCAOB inspects firms that audit U.S.-traded companies, but to date the Chinese government hasn’t allowed the PCAOB inspectors into China to evaluate the firms, leaving the U.S. concerned that any problems at the Chinese firms could be going undetected.

U.S. and Chinese regulators are slated to meet next week in Washington to discuss inspections and other audit-oversight issues.