A long-running dispute between US and Chinese Regulators over
providing audit documents of US-listed Chinese companies has taken
new turns. The dispute shows that multinational companies doing
business in China must be aware of the potentially conflicting
authority of regulators.
The dispute between the SEC and its Chinese counterparts dates
back several years. The SEC wants to obtain information in order to
investigate possible accounting fraud at dozens of Chinese
companies listed on US stock exchanges. But China-based auditors
have refused on the grounds that compliance could violate
China's Law on Guarding State Secrets and result in severe
In December 2012, the SEC started to increase its pressure on
China-based auditors by bringing additional administrative charges
against the Chinese affiliates of the Big Four accounting firms.
Some smaller US accounting firms have already been banned by the
SEC from performing audit work for a number of US-listed Chinese
As of July 2013, following the signing of a memorandum of
understanding between the regulators, the China Securities
Regulatory Commission has been handing over audit documents from
US-listed Chinese companies, obtained from accounting firms, to the
SEC and the Public Company Accounting Oversight Board. However, the
SEC did not obtain all the information it was seeking.
On 22 January 2014, an SEC administrative judge ruled that the
Chinese affiliates of the Big Four violated the Sarbanes-Oxley Act
by refusing to turn over documents of companies investigated for
accounting fraud, and that these firms will be banned from
appearing or practising before the SEC for six months.
In a joint statement, the Big Four announced that they will
appeal against the ruling, and that "in the meantime the firms
can and will continue to serve all their clients without
Although the ruling will not go into effect until the case is
resolved, the Big Four risk losing their clients in China, as they
will not be able to file audited financial statements. Without
audited financial statements, a company cannot stay listed on US
exchanges. More than 100 Chinese companies listed in the US would
therefore have to find a new auditor. Moreover, the ruling
potentially affects US companies active in China as well, as a
number of them use services from the Chinese affiliates of the Big
Four. At the time of this writing, the effect of the ruling on
these companies was yet to be clarified.
The dispute over the exchange of information shows that
multinational companies must be aware of the potentially
conflicting authority of regulators, especially when doing business
in China. We advise companies active in China to take precautions
by identifying information that may be considered sensitive under
China's Law on Guarding State Secrets, and to implement
internal compliance procedures to prevent becoming subject to
potentially severe administrative and criminal liability.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Hon'ble High Court of Bombay has held that where a Scheme of Amalgamation is executed between two companies registered in two different states [...], then the said two orders are two independent instruments.
Lawyers are pretty good at figuring it out quietly and amicably among themselves, without recourse to a public courtroom.
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