December 04, 2012
The SEC Shoots The Accounting Village In China, But The Real Target Is The Chinese Government
Posted by David Zaring

Accounting firms in China have found themselves on the horns of a dilemma as of yesterday, as the SEC launched administrative proceedings against pretty much all of them for "for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors," as the agency put it.  The claim is administrative (i.e., not in court, but headed before an agency ALJ), and you can look at it here.

But the thing is, defendants feel that complying with the SEC's requests for documents is legally prohibited under China law.  Or so they have told the SEC:

Each of the Respondents has informed the Commission that it will not produce the documents to the Commission as requested in the Section 106 requests because, among other things, Respondents interpret the law of the People’s Republic of China as prohibiting Respondents from doing so.

What is really needed here is an agreement with the Chinese government on access to the papers the SEC believes is required.  Without it, the agency is going to have to either take it easy or delist a lot of Chinese companies; this action appears to be a signal that it is serious about doing the latter.  But I'd say the target here are not the accounting firms named in the complaint, but the Chinese regulators standing behind them.

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