The Securities and Exchange Commission recently indicated that it would review, de novo, the January 2014 decision barring the Chinese affiliates of the “Big Four” accounting firms from appearing before the SEC. The Commission’s Order, found here, also granted both parties’ motions to submit additional evidence for consideration – most significantly, the auditors’ evidence that they have given the Chinese regulators the audit work papers of the Chinese companies being investigated by the SEC.
As we wrote earlier here and here, the SEC instituted administrative proceedings in December 2012 against the Chinese affiliates of the accounting firms for willfully refusing to provide audit work papers to U.S. regulators as required under Sarbanes-Oxley. The accounting firms had argued that complying with this requirement would violate China’s state secrets and archives laws, and subject the firms to civil and criminal penalties. In January 2014, an Administrative Law Judge at the SEC found the accounting firms’ “good faith” arguments irrelevant to the issue of whether the firms willfully refused to comply with the SEC’s requests, and barred the firms from appearing before the SEC for six months. Following the ALJ’s decision, both the audit firms and the SEC’s Division of Enforcement petitioned the Commission to review the ALJ decision and allow additional evidence to be submitted.
The Commission’s Order reveals that the audit firms have turned over the audit work papers they had been refusing to produce for years. Although the firms did not produce the requested documents directly to the U.S. regulators, they gave them to the Chinese regulators who can, if they so choose, turn them over to their U.S. counterparts pursuant to the MOU the countries entered into last summer.
The audit firms are no doubt hoping that their “better late than never” productions will be seen as evidence that they were acting in good faith when they refused to comply with the SEC’s requests for the documents. But it will be up to the Commission to decide whether the firms’ motives ultimately matter.