In an Order of Settlement released February 6, 2015, the SEC
agreed to stay the administrative action against the Chinese
affiliates of the "Big Four" accounting firms for
refusing to turn over their audit work papers relating to several
U.S.-listed Chinese companies. As we wrote earlier
here, the Chinese affiliates of the audit firms had been facing
a six-month bar from appearing before the SEC, which would have
disrupted their business and the business of countless U.S.-listed
Chinese companies. The Order acknowledges that the requested
documents have been provided, and allows the audit firms to
continue representing U.S.-listed companies. The Order also
requires each firm to pay a $500,000 fine and agree to abide by
certain procedures regarding the SEC's document requests for
the next four years. If the audit firms follow the procedures set
forth in the Order, the administrative action will be dismissed
after a four-year period.
Throughout the administrative proceeding, the Chinese affiliates
of the "Big Four" argued that they were caught between a
rock and a hard place. If they produced audit work papers directly
to the SEC, they could be subject to civil and/or criminal action
in China for divulging state secrets. And if they did not produce
the requested documents, they could be barred from appearing before
the SEC and effectively lose their ability to audit U.S.-listed
Chinese companies. The terms of the settlement now require the
audit firms to respond to the SEC's future document requests
within 90 days. However, the firms will produce documents to the
China Securities Regulatory Commission (CSRC), not the SEC. Both
the firms and the CSRC will then be permitted to make redactions to
the documents before providing them to the SEC. Additionally, the
audit firms may refuse production altogether if they determine,
along with the CSRC, that the requested documents should be
withheld under China's state secrets regulations.
This settlement appears to send the SEC right back where it
started: unable to review the work papers of Chinese audit firms
without the consent of Chinese regulators. The settlement also
appears to be a complete win for the audit firms. They are no
longer required to produce documents directly to the SEC and risk
violating China's state secrets laws, and they no longer have
to fear being barred from appearing before the SEC – at least
not for the next four years.
This article is presented for informational purposes only
and is not intended to constitute legal advice.
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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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