Law keeps auditors from releasing financial data

A legal dilemma has barred five large audit firms from turning over accounting information gathered from nine China companies listed in the United States to US regulators.

The US Securities and Exchange Commission responded on Monday by accusing the companies of withholding documents from investors.

The commission accused the Chinese affiliates of Deloitte Touche Tohmatsu Ltd, Ernst & Young LLP, KPMG LLP, PricewaterhouseCoopers LLP and BDO International of breaking securities laws after they decided not to file documents that the SEC has requested as it investigates accusations of accounting fraud at the nine Chinese companies.

The auditors unanimously responded by saying Chinese law exempts them from responding to the SEC's inquiries.

"For its part, PwC China has cooperated with the SEC at every opportunity," the company said in a statement. "However, PwC China will, and must, comply with its legal obligations under (Chinese) law.

"This action involves an issue that needs to be resolved between the US and China regulators as it impacts all audit firms in China serving clients who are registered with the SEC. PwC China hopes for continuing dialogue between those two parties to resolve the matter."

Ernst & Young's Hua Ming said regulators from different countries should have close relationships with each other, saying that allows them to cooperate and share information.

"We hope that an agreement can be reached between US and Chinese regulators that will enable our compliance with all applicable laws and regulations."

Auditors have largely blamed the conflict on the differences between Chinese and US laws.

According to KPMG Huazhen, US and Chinese regulators continue to discuss the importance of having a mutual understanding and sharing information.

"We remain hopeful that these ongoing discussions will result in a positive diplomatic resolution," KPMG said.

The SEC has been investigating alleged accounting irregularities at Chinese companies listed on US stock exchanges. As part of that work, it said it needs to gather information about the companies' finances from auditors.

Auditors that don't comply with the SEC demands face temporary or permanent de-registration in the US, according to the rules under which the proceedings are organized, Bloomberg cited Lewis Ferguson, a member of the US Public Company Accounting Oversight Board, as saying at an SEC conference in September.

In 2002, the US adopted the Sarbanes, Oxley Act, a federal law that set new standards for the boards and management of US public companies, as well as the public accounting firms they hire, said Ling Xiao, an IPO specialist at the Zhong Yin Law Firm.

Ling said the bill was enacted following a number of corporate accounting scandals, notably one that cost investors in the former giant Enron Corp billions of dollars when the company's share price collapsed.

"The law requires auditors to accurately review and release corporate financial information," he said. "Only by getting written testimonies from foreign auditors can the SEC test the quality of the underlying audits and protect investors from potential dangers."