SEC charges China affiliates of top accounting firms

(Reuters) - Regulators on Monday charged the Chinese arms of five top accounting firms with securities violations over their refusal to produce certain audit papers for U.S.-listed Chinese companies.

The Securities and Exchange Commission began proceedings against the Chinese affiliates of Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young. It was the SEC's widest enforcement effort yet to procure documents in connection with probes of possible accounting fraud of U.S.-listed Chinese companies, and raised questions about whether talks have stalled between the U.S. and Chinese governments to resolve the issue.

The SEC said it has been seeking documents related to investigations of possible wrongdoing at nine China -based companies. Chinese secrecy laws have stymied efforts to obtain audit documents that investigators need to determine whether there were accounting irregularities.

An administrative law judge will schedule a hearing to determine potential sanctions against the Chinese arms of the accounting firms, the SEC said.

It was unclear whether the SEC's new posture will result in financial penalties and discourage the firms from working with certain Chinese companies, or if the move was designed to force a breakthrough in the larger negations.

In July, the SEC disclosed it was in discussions with Chinese regulators on cross-border cooperation, including access to documents. The Monday action suggests those talks have not progressed to the SEC's satisfaction.

"Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions," SEC enforcement director Robert Khuzami said in a statement announcing the action.

The accounting firms pinned the blame on lack of progress in the negotiations.

The action "is the result of conflicting laws between the U.S. and China," PwC China said in a statement. "This action involves an issue that needs to be resolved between the US and China."

Deloittee said, "While it is unfortunate that the two countries have not yet been able to find common ground on these issues, we remain hopeful that a diplomatic agreement can be reached, and we stand ready to assist that effort in any way we can."

Ernst & Young's China affiliate, Ernst & Young Hua Ming, said in a statement it hoped U.S. and Chinese regulators can reach agreement.

The other firms did not immediately respond to requests for comment.

Separately on Monday, Canada's top securities regulator said it believes Ernst & Young breached the Ontario Securities Act in its audits of Sino-Forest Corp, a China-focused forestry company that collapsed under the weight of fraud allegations. Ernst & Young Canada said in a statement that it is confident its work "met all professional standards.

AUDITOR WATCHDOG ALSO NEGOTIATING

Top accounting firms operate as global networks of legally separate member firms in each country, so all member firms are not liable for the actions in any one country.

The SEC action accuses the affiliates of violating U.S. securities laws that require foreign public accounting firms to provide the SEC with audit work papers involving any company trading on U.S. markets.

Many of the Chinese companies under investigation traded on U.S. exchanges through so-called reverse mergers, and have since been deregistered by the SEC.

Last year, the agency took Deloitte to federal court to try to force that firm to turn over documents in connection with an investigation into Longtop Financial Technologies Ltd. In July, it sought a six-month delay in that legal battle, citing negotiations with Chinese regulators.

Reuters reported last month that the U.S. auditor watchdog, the Public Company Accounting Oversight Board, had completed observations of Chinese inspections of auditors and expressed optimism about talks over access to audit documents.

PCAOB spokeswoman Colleen Brennan said on Monday the agency met with China regulators in Washington in the last week of November.

In a statement, PCAOB Chairman James Doty said his agency's negotiations are proceeding on a separate track from the SEC.

If the agency's efforts don't lead to an agreement, "then we will need to consider other alternatives," Doty said.

(Reporting by Aruna Viswanatha in Washington and Dena Aubin in New York; Editing by Jeffrey Benkoe, Nick Zieminski and David Gregorio)