SEC's Charges Against China-Based Accounting Firms Have Broad Implications

As part of its effort to investigate potential accounting fraud at unnamed China-based companies that are publicly traded in the United States, on December 3, 2012 the U.S. Securities and Exchange Commission (the "SEC") charged the Chinese affiliates of the "Big Four" accounting firms – Ernst & Young, Deloitte, KPMG and PricewaterhouseCoopers – and BDO with violating the Securities Exchange Act and the Sarbanes-Oxley Act. The SEC says that it has sought to obtain audit documents and work papers from each of these firms in connection with its investigation of their publicly traded China-based clients and that each has willfully refused to produce such documents in violation of their legal obligations as foreign public accounting firms. The firms, however, claim that they are not at liberty to produce the documents because doing so could violate China's Law on Guarding State Secrets and result in severe criminal sanctions for their auditors. This apparent conflict between