Accounting firms caught between the laws of China and the US

The US regulator wants them to give up the documents that China considers state secrets

PUBLISHED : Wednesday, 05 December, 2012, 12:00am
UPDATED : Wednesday, 05 December, 2012, 4:45am

The world's top five largest accounting firms facing a US regulatory probe relating to allegations they withheld documents under mainland state secret laws, have called on China and the US to prevent them being sandwiched between the laws of the two countries.

The US Securities and Exchange Commission (SEC) said in an administrative order statement yesterday that it was accusing mainland affiliates of the Big Four accounting firms and BDO of withholding documents from investigators involving potential accounting fraud related to nine mainland Chinese companies listed in the US.

The accounting firms involved reject suggestions of any wrongdoing. They said they could not hand over the documents because under mainland law, accountants' working papers are regarded as state secrets and cannot be taken out of the country.

The SEC named Deloitte Touche Tohmatsu CPA, Ernst & Young Hua Ming, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs and BDO China Dahua as having refused to co-operate with its fraud investigations into mainland companies traded in the US.

In Hong Kong, the High Court will make a landmark ruling in March whether Ernst & Young can use China's state secret laws as the reason for not handing over audit working papers relating to mainland water treatment firm Standard Water to the Securities and Futures Commission (SFC).

SEC enforcement director Robert Khuzami said in a statement yesterday that "only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from … accounting fraud".

He said firms that conduct audits knowing they "cannot comply with laws requiring access to these work papers face serious sanctions".

BDO chairman Albert Au Siu-cheung said the SEC's proceedings against the top five biggest accounting networks show it was not an individual problem but that it affects the industry.

Deloitte and PwC issued statements with similar views. "Accountants are sandwiched between the conflict of the US and the mainland law. This requires the governments of China and the US to work together to solve it," Au told the South China Morning Post.

Deloitte is hopeful of a diplomatic agreement.

PwC China has "co-operated with the SEC at every opportunity", it said, but it will, and must, comply with its legal obligations under China law.

Ernst & Young Hua Ming said: "We hope that an agreement can be reached between US and Chinese regulators."

KPMG Huazhen is also hopeful that US-China discussions will have a positive resolution.