WASHINGTON â€" The Securities and Exchange Commission charged China-based affiliates of the five largest United States accounting firms on Monday with violating securities laws, saying that the firms failed to produce work papers from their audits of several China-based companies that are under S.E.C. investigation.
In an administrative proceeding, the S.E.C. said that the accounting firms refused to cooperate with the document request in part because the accountants “interpret the law of the People's Republic of China as prohibiting†them from releasing the papers.
The nine Chinese companies all have shares that are traded in the United States, making them subject to American securities laws. The accounting firms under invest igation by the S.E.C. are the Chinese affiliates of Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers and BDO.
“Only with access to work papers of foreign public accounting firms can the S.E.C. test the quality of the underlying audits and protect investors from the danger of accounting fraud,†Robert Khuzami, the commission's enforcement director, said in a statement.
“Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions,†Mr. Khuzami said.
Among the possible sanctions is a sort of accounting death sentence: Forbidding a firm from practicing before the S.E.C., meaning that the firm's audits of publicly traded companies would not satisfy securities laws.
The S.E.C. did not name the publicly traded Chinese companies that are the subject of its document request. But the commission has previously said it is looking closely at Chinese companies that have taken part in revers e mergers in order to gain access to American investors.
In a reverse merger, a company that has continuing operations takes over a company that already has publicly traded shares. Often, these are shell companies with no real operations and whose shares are listed over-the-counter or among penny stocks.
The S.E.C. already has de-registered the securities of nearly 50 such companies and has filed fraud cases against 40 foreign companies and executives. In addition, earlier this year the S.E.C. announced an enforcement action against the Deloitte affiliate, Deloitte Touche Tohmatsu, over failure to produce documents related to an S.E.C. investigation of one of its China-based clients.
The issue also has been the focus of the Public Company Accounting Oversight Board, an independent agency that oversees accounting firms that audit publicly traded companies.
