U.S. and China Ramp up Clash over Cross Jurisdiction Audits

October 20, 2011 Posted by China Briefing Reading Time: 2 minutes

Oct. 20 – The United States, its financial regulators, and now its courts are locked in a battle with Chinese regulators over the provision of documents related to alleged fraud committed by Chinese companies listed in the United States. China’s financial regulators have forbidden the Big Four audit firms from releasing any documentation concerning Chinese companies with subsidiaries in the United States to American regulators. China’s Ministry of Finance and the Securities Regulatory Commission have given all Big Four firms one week from yesterday to provide to them statements of their reviews of all U.S.-listed Chinese firms, and of any instances where information concerning them has been passed to U.S. investigators.

The U.S. Securities and Exchange Commission (SEC) last week asked an American court to enforce a subpoena sent to Deloitte’s China practice for documents related to its audit of scandal-hit Longtop Financial Technologies. The SEC have asked for copies on all correspondence on U.S. audit work between Deloitte’s Mainland China offices, and their offices in Hong Kong and Macau. They have also asked for details of audits provided by Hong Kong offices of U.S. listed business in Mainland China.

Chinese regulators have rebuffed such moves, saying it does not want to give in to pressure to hand over documents to regulators from outside China. The Chinese regulators have apparently stressed the need for “confidentiality” and to uphold the Chinese regulators authority in handling documents related to companies in China.

The issue is putting the two regulatory bodies head to head with the firms being squeezed in the middle. If the firms do not comply with U.S. wishes, they could face huge fines in the United States as well as charges of contempt of court. Should they not comply with China’s wishes, the same could follow, as could withdrawal of their business licenses and possible jail sentences – in China – for releasing documents that could be considered as “state secrets.” The stakes are high, and neither regulatory body wants to be seen as acquiescing to the other.

The underlying trend is also of suspicions from the U.S. side that Chinese-owned businesses have been systematically involved in fraudulent behavior in the United States while being able to hide under a cloak of unaccountability and lower standards of financial reporting in China.

Attempts by U.S. regulators to engage in a bilateral agreement with Chinese regulators over the correct procedures to handle investigations of wrongdoing and criminal activity by companies wearing hats in both China and the United States have thus far come to nothing. What is for sure is that the issue has the potential to be highly explosive, both for China, the United States and the Big Four firms involved.

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