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.
"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 ourregulatory 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.
(Reporting by Andrea
Shalal-Esa and Sarah N. Lynch; Editing by John Wallace and Tim Dobbyn)
Source : Reuters
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