The U.S. Securities and Exchange Commission has accused five Chinese accounting firms, including affiliates of the United States’ “big four,” of refusing to produce documents related to an agency investigation of fraud.

The SEC on December 3 initiated administrative proceedings against the companies, claiming they violated the Securities and Exchange Act and the Sarbanes-Oxley Act for failing to produce audit paperwork related to an SEC investigation of alleged accounting fraud against U.S. investors.

For the past several months, the SEC has been trying to obtain the audit paperwork from the accounting firms — BDO China Dahua Co. Ltd, Deloitte Touche Tohmatsu Certified Public Accountants Ltd, Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership) and PricewaterhouseCoopers Zhong Tian CPAs Limited — but the firms have refused because they say doing so would violate Chinese law.

“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 the dangers of accounting fraud,” Robert Khuzami, Director of the SEC’s Division of Enforcement, said in a written statement. “Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions.”

The SEC order notes that Sarbanes-Oxley directs foreign public accounting firms to “produce the audit workpapers” to the agency upon request, and that a “willful refusal to comply” is a violation of the law.

The order requires an administrative law judge to determine appropriate sanctions against the accounting firms by the end of September next year.

The big four accounting firms are Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG.

The attorneys representing the firms either declined to comment, couldn’t be reached or directed questions to the companies. Statements issued by their clients said this is an industry-wide issue not connected to a single firm, and that the companies are stuck between Chinese and American laws with different requirements — issues that should be resolved between U.S. and Chinese regulators.

Washington-based DLA Piper partner and chair of the firm’s securities enforcement practice, Deborah Meshulam, who represents BDO China, did not respond to a request for comment. Likewise, Geoffrey Aranow, a Washington-based partner for Bingham McCutchen who represents KPMG, also did not respond. Michael Warden, a Washington-based Sidley Austin partner who represents the Chinese affiliate of Deloitte Touche Tohmatsu, forwarded a request for comment to Deloitte media contact Lauren Mistretta, who forwarded the following statement:

“The SEC’s Order Instituting Proceedings against the China member firms of five of the largest networks confirms that the issue of document production by Chinese accounting firms to foreign regulators is a matter that needs to be resolved on a profession-wide basis. 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.”

In May, the SEC initiated administrative proceedings against Shanghai-based Deloitte Touche Tohmatsu for similar violations. That proceeding is ongoing.

Davis Polk & Wardwell partner Michael Flynn represents PricewaterhouseCoopers China, which issued the following statement:

“Today’s action by the US Securities and Exchange Commission is the result of conflicting laws between the US and China. The fact that the action is being taken collectively against all of the four largest audit firms and one other firm demonstrates that this is a profession-wide issue, not unique to one firm. For its part, PwC China has cooperated with the SEC at every opportunity. However, PwC China will, and must, comply with its legal obligations under China law. This action involves an issue that needs to be resolved between the US and China regulators as it impacts all audit firms in China serving clients who are registered with the SEC.”

Richard Martin, a partner at Orrick, Herrington & Sutcliffe, represents Ernst & Young Hua Ming. He didn’t return a call, but the company issued the following statement:

“Ernst & Young Hua Ming supports close working relationships between regulators to enable them to cooperate and share information with one another,” the company said. “We hope that an agreement can be reached between U.S. and Chinese regulators that will enable our compliance with all applicable laws and regulations.”


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