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Ruling in Case Against Chinese Auditors Delayed to January

October 14, 2013

The SEC’s chief administrative law judge said an extra three months were needed to review the thousands of pages of documents in a complaint against the Chinese affiliates of the major audit firms. A ruling in favor of the SEC could bar the affiliates of Ernst & Young, KPMG, Deloitte & Touche, Pricewaterhousecoopers, and BDO from working on audits of U.S. companies.

The SEC granted a request from its chief administrative law judge to delay a ruling on a complaint against the Chinese affiliates of the major audit firms until January 2014.

A decision had been due in March 2013, but the SEC granted an extension until October 11 because of delays in hearing the case as the SEC attempted to negotiate a settlement with the China Securities Regulatory Commission to turn over the audit firms’ client paperwork.

The latest delay was granted because Chief Administrative Law Judge Brenda Murray said more time was needed given her department’s workload and the large volume of documents generated by the case. The documents include 2,700 pages of transcripts from a 12-day hearing, 1,000 exhibits from each side, and 250 pages in post-hearing briefs from the opposing legal teams.

The SEC’s Enforcement Division wants to bar Ernst & Young Hua Ming LLP, KPMG Huazhen, Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Pricewaterhousecoopers Zhong Tian CPAs Ltd., and BDO China Dahua Co. Ltd. for “willfully” flouting U.S. laws by not producing the audit papers. The firms said they have no control over a government policy that bars them from giving documents directly to the SEC. (See Big Four Chinese Affiliates Face Ban from U.S. Market in the September 10, 2013, edition of Accounting & Compliance Alert.)

The complaint is perhaps the most volatile portion of a dispute between U.S. and Chinese regulators that has been waged for the past several years. The SEC and PCAOB want more access to the Chinese audit firms to investigate allegations of accounting fraud at many of the Chinese companies that have gone public on U.S. markets in the past decade.

China fears the exposure of state secrets.

In recent motions filed in the administrative law hearing, lawyers from the audit firms have argued that Chinese regulators have begun cooperating with the SEC, which should render the SEC’s case moot. The SEC has said it doubts the Chinese are willing to become a reliable partner in investigating fraud cases.