http:\/\/pcaobus.org\/International\/Documents\/MOU_China.pdf<\/a>) The historical Agreement formally creates a mechanism wherein both sides will allow \u201cproduction and exchange of audit documents relevant to investigations in both countries\u2019 respective jurisdictions.\u201d The PCAOB Chairman James R. Doty said, \u201cThis agreement with China is an important step toward cross-border enforcement cooperation\u2026\u201d<\/p>\nPerhaps the most interesting aspect of the Agreement is that the SEC is not a party. What does that mean for the future of securities enforcement? In order to understand the full picture, we need to look back a few months.<\/p>\n
As you may recall, on December 3, 2012, the SEC commenced administrative proceedings against the China affiliates of several accounting firms for their audit work papers related to nine China-based companies, the securities of which are traded publicly on U.S. exchanges. The SEC action was based on the audit firms\u2019 refusal to cooperate in the investigations. According to news sources, the basis for failure to turn over records may relate to Chinese law. That is, according to the Wall Street Journal, \u201c(The audit firms) say Chinese law treats audit documents about Chinese companies as akin to state secrets, and that their employers could be jailed if they act without Chinese government blessing.\u201d Thus, the accounting firms have been effectively caught as a pawn in the complexities of U.S.-China relations.<\/p>\n
Why is access important to the SEC\u2019s enforcement agenda? Let\u2019s go back to the RINO case. Based on the SEC\u2019s press release, \u201cRINO\u2019s periodic filings contained false and misleading statements and omissions about the company\u2019s revenue and operations from 2008 to 2010. RINO maintained two conflicting sets of financial records \u2014 one set of books for filings in China and another set of books for filings in the U.S. The Chinese books reflected sales of approximately $31 million from the first quarter of 2008 through the first three quarters of 2010. But the U.S. books that formed the basis for RINO\u2019s SEC filings contained false contracts and portrayed sales revenues of approximately $491 million during that same time period \u2014 more than 15 times greater than the revenues recorded in the Chinese books.\u201d The issue is that the SEC has not been able to gain access to the second set of books in China.<\/p>\n
While the PCAOB announcement suggests that we are heading toward a level of accessibility that would aid the SEC in some way, the Agreement is far from perfect. The good news is that in theory it will allow the PCAOB to obtain audit records and other financial documents from Chinese audit firms with the assistance of China\u2019s Securities Regulator and Ministry of Finance. Indeed, the PCAOB Chairman said, \u201cThe agreement allows the PCAOB to share the documents it obtains with the SEC as long as it gives the Chinese advance notice of the sharing.\u201d However, the bad news is that the Agreement \u201cwon\u2019t allow the SEC to use the PCAOB as a workaround to get documents that it couldn\u2019t otherwise,\u201d said Doty. How that is monitored remains unknown and no doubt will be an area of concern to defense lawyers.<\/p>\n
However, that leaves the SEC without a solution. It is likely that by this October the SEC administrative law judge will rule on whether the China-based accounting firms are required to turn over the audit records, if no diplomatic solution emerges. The downside for Chinese accounting firms is that if the court rules against them they may be prohibited from auditing U.S.-traded companies: a severe price to pay indeed. It appears to this author and a number of others that diplomacy may prevail in the end and the SEC will likely get some of what it wants: access to records. It would not be fair to the accounting industry to force a non-diplomatic solution.<\/p>\n
The broader lesson for China-based companies is to be aware of these ongoing events and be mindful of potential regulatory obligations and risks under U.S. law. Additionally, those looking to acquire Chinese companies should take heed of developments as they unfold. The sands are once again shifting, and understanding that the U.S. may soon have access to your Chinese books, records and audit papers is a potential area of risk. Looking to address this risk soon is the best way to avoid lengthy and costly issues with U.S. regulators, company shareholders and others.<\/p>\n","protected":false},"excerpt":{"rendered":"
On May 15, 2013, the U.S. Securities and Exchange Commission charged CEO Dejun Zou and board chair Amy Qiu, husband-and-wife executives at China-based RINO International Corporation, alleging that they engaged in a scheme to overstate the company\u2019s revenues and divert $3.5 million in proceeds from a securities offering for their personal use. This would be … <\/p>\n
Continue reading “Historic U.S., China Agreement on Auditor Access Announced: Is This a Crack in the Wall Separating The Cross-Border Enforcement Cooperation Impasse?”<\/span><\/a><\/p>\n","protected":false},"author":13,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[52,43,53,11,13],"ppma_author":[244],"class_list":["post-50","post","type-post","status-publish","format-standard","hentry","category-general","tag-enforcement","tag-sec","tag-securities","tag-white-collar","tag-wolfe"],"authors":[{"term_id":244,"user_id":13,"is_guest":0,"slug":"mmwolfe","display_name":"Mauro M. Wolfe","avatar_url":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-content\/uploads\/sites\/11\/2015\/01\/wolfemauro-125x150.jpg","0":null,"1":"","2":"","3":"","4":"","5":"","6":"","7":"","8":"","9":"","10":""}],"_links":{"self":[{"href":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-json\/wp\/v2\/posts\/50","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-json\/wp\/v2\/users\/13"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-json\/wp\/v2\/comments?post=50"}],"version-history":[{"count":0,"href":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-json\/wp\/v2\/posts\/50\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-json\/wp\/v2\/media?parent=50"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-json\/wp\/v2\/categories?post=50"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-json\/wp\/v2\/tags?post=50"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/whitecollarcriminallaw\/wp-json\/wp\/v2\/ppma_author?post=50"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}