Friday, May 11, 2012

SEC Brings Action against Chinese Audit Arm of Big Four Audit Network for Failing to Produce Work Papers


The SEC has begun an administrative proceeding against the Chinese member firm of a Big Four audit network for its alleged willful failure, in response to a Commission request, to provide audit work papers despite its legal obligations, as a registered accounting firm, to do so. The firm is a public accounting firm registered with the Public Company Accounting Oversight Board, and located in Shanghai, the People’s Republic of China. (In the Matter of Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Release No. 34-14872, May 9, 2012)

Beginning in April 2010, SEC staff has made extensive efforts to obtain the audit work papers connected to the firm’s independent audit work for an issuer-client in relation to a Commission investigation into potential accounting fraud. The firm said that it would not produce the relevant audit work papers because of its interpretation that it was prevented from doing so by PRC law. The SEC staff sought to obtain the relevant audit work papers through international sharing mechanisms. However, these efforts have been unsuccessful.

In conjunction with the staff’s efforts to obtain the relevant audit work papers through the firm’s local regulator, pursuant to Section 106 of the Sarbanes-Oxley Act as amended by Section 929J of the Dodd-Frank Act, the Commission staff served the firm, through its designated U.S. agent, with a request for all audit work papers and all other documents related to any audit work or interim reviews performed for the issuer for the fiscal year ending December 31, 2009. As of the date of the filing of the administrative proceeding, the SEC staff did not have the audit work papers sought in the Section 106 request.

 The SEC noted that Section 106(b) of Sarbanes-Oxley directs a foreign public accounting firm that  issues an audit report, performs audit work or interim review to produce its audit work papers to the Commission upon request. Section 106(e) provides that a willful refusal to comply with such a request by the Commission is a violation of Sarbanes-Oxley, which also constitutes a violation of the Securities Exchange Act. According to the SEC, the audit firm willfully refused to provide the Commission with its audit work papers and all other documents relating to its audit work for the issuer, and thus willfully violated Sarbanes-Oxley and the Exchange Act.  

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