SEC Buys Time Trying to Settle with Big 4 Firms Over China Flap

The Securities and Exchange Commission has extended its briefing schedule in its case against Big 4 network firms in China to allow more time to pursue some kind of settlement.

The SEC issued an extension order indicating Ernst & Young Hua Ming, KPMG Huazhen, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers Zhong Tian along with the SEC's Division of Enforcement were requesting a 90-day extension of the schedule set by the SEC to hold briefings on the continued standoff over audit work papers in China. An SEC administrative law judge determined the four firms along with BDO China Dahua would be banned from performing work regulated by the SEC for six months as the firms have refused to produce audit work papers related to their work for companies in China that are listed on U.S. exchanges. The SEC has called for the work papers to investigate various allegations of accounting improprieties and possible fraud involving the five firms' audit clients. The firms say they are forbidden under law in China from handing over the documents.

The SEC extension says the enforcement division and the firms believe the 90-day extension would “facilitate the parties' continued settlement efforts.” They also say continuing the talks while also holding briefings would be difficult, given the breadth, complexity, and sensitivity off the issues involved. “Extensions of time are disfavored,” the extension order says. “It appears appropriate, however, to grant the requested extension.”

At Compliance Week's recent annual conference, SEC Enforcement Director Andrew Ceresney said he's hopeful the enforcement process against the firms will lead to access to the necessary work papers. “It's very important for us to be able to obtain those work papers,” he said. “One of the fundamental ways to investigate financial fraud is to look at the audit work and what they're saying to their auditors and what the auditors are finding.”

Paul Gillis, a professor Peking University and an expert on the audit regulatory environment in China, says he doesn't believe it's possible for the SEC to reach any kind of settlement with the firms. “The Big 4 do not have the ability to cut a deal,” he says. “Any deal has to be between the United States and China.” He says the next best hope for any kind of agreement is at the U.S.-China Strategic and Economic Dialogue in July in Beijing. “But tensions between the U.S. and China are high, which might make a deal more difficult,” he says.