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Thomas O. Gorman,
Dorsey and Whitney LLP
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Gorman.tom@Dorsey.com

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    SEC Brings Proceedings Against PRC Based Affiliates of Audit Firms

    The SEC instituted administrative proceedings against the affiliates of five major accounting firms based in the Peoples Republic of China, or the PRC, which bodes ill for companies based there to have continued access the U.S. capital markets. In the Matter of BDO China Dahua CPA Co., Ltd., Adm. Proc. File No. 3-15116 (Dec. 3, 2012). The Order names as Respondents: BDO China, Ernst & Young Hau Ming LLP, KPMG Huazhen (Special General Partnership), Deloitte Touche Tohmatsu Certified Public Accountants Ltd. and PricewaterhouseCoopers Zhong Tian CPAs Ltd.

    The proceeding is based on Rule 102(e)(1)(iii) which permits the Commission to temporarily or permanently deny any person found to have willfully violated or aided and abetted the violation of the Federal securities laws. Section 106 of the Sarbanes-Oxley Act of 2002, as amended by the Dodd-Frank Act, is alleged to have been violated. That Section provides that a PCAOB registered firm that audits the financial statements of a U.S. issuer consents to produce its work papers on request by either the Board or the SEC.

    In this matter, each Respondent is registered with the PCAOB. Each Respondent is alleged to have have been engaged to audit the financial statements of a PRC based U.S. issuer. Each Respondent was served with a request by the Commission to produce all of its audit work papers for a designated period. Each Respondent declined, at least in part, based on their understanding that the law of the PRC precluded the production. The Order directs that a hearing be held before an ALJ to hear evidence.

    This is not the first such proceeding by the Commission. Previously, a similar proceeding was instituted against the Deloitte PRC affiliate. In the Matter of Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Adm. Proc. File No. 3-14872 (May 9, 2012). That proceeding is also based on SOX Section 106 and Rule 102(e). That same firm is a defendant in a subpoena enforcement action brought by the Commission on essentially the same basis. SEC v. Deloitte Touche Tohmatsu CPA, Ltd., File No. 1:11-MC-00512 (D.D.C. Filed Sept. 8, 2011). That action was stayed earlier this year pursuant to a Commission request, citing on-going negotiations with a foreign regulator. The parties are due to report back to the Court in January.

    To date the Commission’s efforts have been fruitless. If the impasse persists there may be a point at which PRC based companies are not be able to access the U.S. capital markets.

    Program: Bloomberg Webcast: Current SEC Enforcement Trends (here)

    Hurricane Sandy: As we enjoy the holiday season please remember the victims of Sandy’s destruction with a donation to the Red Cross (here).

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