WASHINGTON: The U.S. Justice Department is investigating
accounting irregularities at
Chinese companies listed on U.S. stock exchanges, said an official with the Securities and Exchange Commission, suggesting criminal
charges may be brought in addition to civil proceedings,
according to Reuters on Thursday, Sept 29
"There are parts of the Justice Department that are actively
engaged in this area," Robert Khuzami, director of enforcement
at the SEC, said in an interview on Tuesday. He told Reuters that a number of federal prosecutors around the United States were taking part in
the investigation, but he declined to name them.
Involvement of U.S. attorneys general in various locations adds
investigative firepower to the SEC
and the Federal Bureau of Investigation, which are also probing the accounting methods
of certain U.S.-listed Chinese companies.
"I think that you will see greater (Department of Justice) involvement as time goes on,"
Khuzami said when asked if criminal charges would be filed in the investigation.
A former federal prosecutor, he
declined to elaborate on which Chinese companies or auditors
were being scrutinized by the
Justice Department.
An SEC review of accounting problems at foreign-based stock
issuers sharpened its focus earlier this year when dozens of
China-based companies began
disclosing auditor resignations or book-keeping irregularities.
For example, Deloitte Touche Tohmatsu CPA Ltd in May resigned as auditor of Chinese
software company Longtop Financial Technologies Ltd,
saying it had found falsified financial records and bank
balance confirmations.
Shares of some Chinese companies listed in the United
States fell on Thursday after Khuzami's statements became
public. Among them, Sohu.com
Inc closed 4.7 percent lower at $50.62, Baidu Inc fell 9.2 percent
to $110.29, China Sky One Medical Inc declined 3.8 percent to $2.29, and Sina Corp ended down 9.7
percent at $73.23.
The SEC has struggled to gain access to documents it needs in
the investigation because strict
Chinese laws have made auditors
reluctant to turn them over.
The FBI has an embedded agent
in an SEC working group on Chinese companies that enter the stock market through so-called
reverse mergers with U.S. shell companies.
Officials from the SEC and the Public Company Accounting
Oversight Board (PCAOB) are due
to meet with their Chinese counterparts in Washington, D.C.
in October for a second round of
talks on joint inspections of
auditing firms in China. "Not having proper accounting
and reliable audit review for publicly traded companies with operations in China is just not
acceptable. We have to find a path to resolution of this issue," Khuzami said. "It is ... a big issue
for us." Earlier in September, the SEC
sought a federal court order to force the Shanghai arm of
Deloitte to turn over its work papers regarding Longtop
Financial.
The results of the Deloitte subpoena enforcement action
will be closely watched by other
auditing companies, Khuzami said. The federal government is
also pursuing other options to ensure better accounting
practices at U.S.-listed companies based in China, he said.
"Obviously, the results here will inform the conduct of others that
are similarly situated. In that sense, it's going to be
instructive," Khuzami said. "At the same time, we're not a one-trick pony; There are other efforts to
reach resolution of these issues.
We continue to work closely with our regulatory counterparts in China and in other countries to find a path to resolution."
In a recent interview with Reuters, Assistant Attorney
General Lanny Breuer, head of the Justice Department's criminal
division, underscored the government's commitment to
fighting accounting fraud of any
kind. He declined, however, to
comment on specific cases that
could be brought against Chinese
firms listed in the United States.
The Justice Department declined
comment for this story, saying it
does not confirm or deny
investigations.
In any criminal case, the question
would be whether the company
lied to the auditor, or whether
the auditor acted recklessly or
knowingly in not detecting the
alleged fraud.
Merely not providing records
under these circumstances -- as
in the Deloitte case -- would not
likely rise to the level of criminal
violation, Khuzami said.
The PCAOB, the agency that oversees auditors of public companies, has inspection authority over auditing firms, while the SEC has enforcement
authority over those companies.
Together, the two agencies have
greater leverage over auditing firms than do criminal authorities, Khuzami said. - Reuters
r (Department of Justice) involvement as time goes on,"
Khuzami said when asked if criminal charges would be filed in the investigation.
A former federal prosecutor, he
declined to elaborate on which Chinese companies or auditors
were being scrutinized by the
Justice Department.
An SEC review of accounting problems at foreign-based stock
issuers sharpened its focus earlier this year when dozens of
China-based companies began
disclosing auditor resignations or book-keeping irregularities.
For example, Deloitte Touche Tohmatsu CPA Ltd in May resigned as auditor of Chinese
software company Longtop Financial Technologies Ltd,
saying it had found falsified financial records and bank
balance confirmations.
Shares of some Chinese companies listed in the United
States fell on Thursday after Khuzami's statements became
public. Among them, Sohu.com
Inc closed 4.7 percent lower at $50.62, Baidu Inc fell 9.2 percent
to $110.29, China Sky One Medical Inc declined 3.8 percent to $2.29, and Sina Corp ended down 9.7
percent at $73.23.
The SEC has struggled to gain access to documents it needs in
the investigation because strict
Chinese laws have made auditors
reluctant to turn them over.
The FBI has an embedded agent
in an SEC working group on Chinese companies that enter the stock market through so-called
reverse mergers with U.S. shell companies.
Officials from the SEC and the Public Company Accounting
Oversight Board (PCAOB) are due
to meet with their Chinese counterparts in Washington, D.C.
in October for a second round of
talks on joint inspections of
auditing firms in China. "Not having proper accounting
and reliable audit review for publicly traded companies with operations in China is just not
acceptable. We have to find a path to resolution of this issue," Khuzami said. "It is ... a big issue
for us." Earlier in September, the SEC
sought a federal court order to force the Shanghai arm of
Deloitte to turn over its work papers regarding Longtop
Financial.
The results of the Deloitte subpoena enforcement action
will be closely watched by other
auditing companies, Khuzami said. The federal government is
also pursuing other options to ensure better accounting
practices at U.S.-listed companies based in China, he said.
"Obviously, the results here will inform the conduct of others that
are similarly situated. In that sense, it's going to be
instructive," Khuzami said. "At the same time, we're not a one-trick pony; There are other efforts to
reach resolution of these issues.
We continue to work closely with our regulatory counterparts in China and in other countries to find a path to resolution."
In a recent interview with Reuters, Assistant Attorney
General Lanny Breuer, head of the Justice Department's criminal
division, underscored the government's commitment to
fighting accounting fraud of any
kind. He declined, however, to
comment on specific cases that
could be brought against Chinese
firms listed in the United States.
The Justice Department declined
comment for this story, saying it
does not confirm or deny
investigations.
In any criminal case, the question
would be whether the company
lied to the auditor, or whether
the auditor acted recklessly or
knowingly in not detecting the
alleged fraud.
Merely not providing records
under these circumstances -- as
in the Deloitte case -- would not
likely rise to the level of criminal
violation, Khuzami said.
The PCAOB, the agency that oversees auditors of public companies, has inspection authority over auditing firms, while the SEC has enforcement
authority over those companies.
Together, the two agencies have
greater leverage over auditing firms than do criminal authorities, Khuzami said. - Reuters