SEC case against China firms advances | China Accounting Blog | Paul Gillis

SEC case against China firms advances

The SEC administrative proceedings against the Big Four and BDO in China have shown some life.

On April 30, the Administrative Trial Judge issued a ruling shooting down a request for summary judgment on a number of procedural issues. The accounting firms were mostly trying to get the case dismissed based on arguments they were not properly served.

The firms also argued that in a number of the instances in which they were charged they did not actually issue any audit reports, which under their legal theory ought to set them free. I have suspected that many of these cases related to companies that attempted to upgrade to Big Four firms when the reverse merger scandals began to appear in large numbers in 2011. Many companies that had to come to market using smaller accounting firms tried to change to a Big Four firm to distinguish themselves from other reverse merger companies. This was particularly common with former clients of Frazier Frost, which had a number of clients fail in the early running of the scandals. In a number of cases the attempt to upgrade failed when the Big Four firm could not get comfortable with their new client, and that often led to the company being delisted. The SEC probably asked for the working papers on these companies to figure out what went wrong.

The judge was unimpressed with the Big Four’s arguments and rejected their request for summary disposition. Next step is a pre-hearing conference, and the judge told the parties to suggest some dates.

I don’t think anyone is in a hurry to resolve this. All hopes seem focused on the U.S. China Security and Economic Dialogue in Washington in early July. That is probably the best, and perhaps last, chance for the U.S. and China to resolve the issue before it spins out of control.

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