US takes accounting firms to court

The China-based affiliates of five accounting firms, including the Big Four, face the possibility of losing both their right to practice and their registration with the US accountancy regulator, a prominent accounting expert in Beijing said Saturday after the US Securities and Exchange Commission (SEC) charged the affiliates with breaking US securities laws.

The SEC has brought the lawsuits against the accounting firms to a US administrative law judge, accusing the accountants of violating the US Securities Exchange Act and the Sarbanes-Oxley Act by refusing to produce audit work papers to the SEC during probes into possible accounting frauds, the US stock market watchdog said in a statement on December 3.

"The judge will have a wide range of punishments available, but the most meaningful would be to revoke the practice rights of the firms," Paul Gillis, an accounting professor at Peking University, wrote on his China Accounting Blog Saturday.

The defendants in the SEC case, who audit the books for US-listed Chinese companies, are Beijing-based BDO China Dahua, Ernst & Young Hua Ming and KPMG Huazhen, as well as Shanghai-based Deloitte Touche Tohmatsu Certified Public Accountants and PricewaterhouseCoopers Zhong Tian, the SEC document said.

Since 2010, 42 class action lawsuits in the US have targeted Chinese reverse mergers, the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research in Boston said in its 2011 year review. A number of the companies charged were audited by the SEC defendants.

"All the lawyers I talk to seem to think the case against the firms is a slam dunk for the (US) government," wrote Gillis, who is also an advisor to the Public Company Accounting Oversight Board (PCAOB), the US accountancy regulator.

The accountants were not available for comment Sunday. "Deloitte has said Chinese law prohibits it from turning over the documents," Reuters reported in June.

Only some Chinese firms listed through reverse mergers in the US have distorted financial statements, but the collateral reputation damage ripples across all Chinese companies, Thomas A Myers, founder of Colorado-based forensic accounting firm TA Myers & Co, told the Global Times Saturday.

China should improve its regulations so they "require Chinese companies to undertake appropriate accounting and legal measures to be sure they comply with (US) capital market standards," Myers said on the sidelines of a forum held by the Center for International Business Ethics at the University of International Business & Economics in Beijing.

Myers believes the problems have resulted from rapid economic growth in a short time in China, but do not reflect any intrinsic, systemic fraud.

The PCAOB met with Chinese officials in Washington DC in November to discuss sharing audit documents and enhancing cooperation on investigation and law enforcement, news portal qq.com said Friday, citing PCAOB board member Lewis Ferguson.

The SEC action will make it difficult for Chinese regulators to reach a near term agreement with the PCAOB, because China may not want to appear to be "caving in to US demands," Gillis said.

Gillis said that the PCAOB will "most likely" modify its rules so that it will not register firms that it cannot inspect, and "terminate the registration of any registered firms that it cannot inspect."