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SEC ups the ante on audits of Chinese companies listed in US

13 February 2014. Published by Robert Morris, Partner

In its "Initial Decision" No. 553, a US Securities and Exchange Commission administrative law court recently concluded that the Chinese affiliates of five international accounting firms breached section 106 of the US Sarbanes-Oxley Act 2002 ...

… in failing to comply with SEC requests for audit documents relating to Chinese companies listed in the US.

In brief, the court found that the accounting firms breached section 106(e) of the Act by allegedly "willfully refusing" to comply with SEC requests for the audit papers relating to the firms' audits of ten Chinese companies listed in the US.

The court's decision to suspend the Chinese affiliates of the Big Four accounting firms from practicing before the SEC for six months, and thereby issuing audit reports for US listed clients, does not take effect until the appeals process has concluded.  The Big Four firms have announced an intention to appeal.

This case shows the serious challenges for international accounting when regulatory regimes do not act in harmony.

In May 2013 the US Public Company Accounting Oversight Board, the China Securities Regulatory Commission and the Chinese Ministry of Finance entered into a Memorandum of Understanding on Enforcement Cooperation, providing for mutual assistance and the exchange of information in order to secure compliance with their respective securities laws.

Let us hope that behind the scenes the SEC and the CSRC will find a way to resolve this issue where all international accountants find themselves between a rock and a hard place.