China: SEC Announces Settlement With "Big Four" China Accounting Firms Over Production Of Documents Located In China

Last Updated: 12 February 2015
Article by Robert G. Cohen

Today, the Securities and Exchange Commission ("SEC" or "Commission") announced the terms of a settlement with four of the Respondents in In the Matter of BDO China Dhaua CPA Co., Ltd. The four Respondents are the China affiliates of the "Big Four" international accounting firms —Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited. The settlement resolves an administrative proceeding brought by the Commission against Respondents pursuant to Rule 102(e) of the SEC's Rules of Practice over requests made by the SEC for the production of audit work papers located in China.

The SEC's Division of Enforcement ("the Division") requested audit work papers and related documents from each of the four Respondents pursuant to Section 106 of the Sarbanes-Oxley Act of 2002. In each instance, the requested documents were located in China and related to work done for a China-based company that was, at some point, listed on a U.S. stock exchange. In response to the requests, each of the four Respondents engaged in a lengthy series of correspondence with the Division to explain that, under Chinese law and pursuant to explicit instructions from Chinese regulators, the requested documents could not be produced directly to the SEC. The Respondents urged the Division to seek the documents through the Chinese regulator, pursuant to existing agreements between the two agencies.

Instead, in December of 2012 the Commission initiated this administrative proceeding pursuant to Rule 102(e)(1)(iii), citing to the Division's allegations that each of the firms "willfully refused" to provide their audit work papers and other documents to the Commission, as required by Section 106. Under Rule 102(e), the Respondents faced censure or even a bar from appearing or practicing before the Commission for not producing requested materials. In practical terms, being barred from appearing before the Commission would effectively end Respondents' work for any company listed on a U.S. stock exchange.

During the course of the proceeding, Respondents argued that they did not "willfully refuse" to produce the relevant documents to the SEC—a standard, they argued, which requires proof of an intentional violation—but were directly prohibited from doing so by Chinese law and regulators.

After a July 2013 hearing, Administrative Law Judge Cameron Elliot agreed with the Division and held that under Section 106, "'willful refusal to comply' means 'choosing not to act after receiving notice that action was requested,' without regard to good faith." According to Judge Elliot, under this definition "the motive for the choice is irrelevant, so long as the Respondent knew of the request and made a choice not to comply with it" and, as such, "bad faith need not be demonstrated, and good faith is not a defense." Accordingly, under Judge Elliot's interpretation of Section 106, any restriction placed upon the Respondents by Chinese law or by Chinese regulators was deemed irrelevant to the "willful refusal" analysis. Judge Elliot censured each of the Respondents and barred them from appearing or practicing before the Commission for six months.

Both the Division and the Respondents appealed Judge Elliot's ruling to the Commission. During the pendency of that appeal, the parties reached this settlement, thereby terminating the appeal and resolving the case. The terms of the publicly disclosed settlement provide for firm censures, payment of $500,000 by each Respondent, a stay of the proceeding, which will be dismissed if not restarted within four years, and undertakings for new procedures designed to control future requests for work papers and other documents located in China. Each Respondent also admitted to a series of facts regarding the matter and consented to entry of the Order, which contains a finding by the Commission that Respondents willfully violated Section 106.

Under the new procedures for SEC document requests covered by Section 106, for a period of four years from the date of the issuance of the Order, any Division request for audit work papers (and related documents) held in China will be made to the China Securities Regulatory Commission ("CSRC") pursuant to existing international sharing mechanisms, such as the IOSCO Memorandum of Understanding. At the same time, the Division will also either issue a Section 106 request for the same information to the relevant firm's designated U.S. counterpart, or, provide the firm with notice of the SEC's request to the CSRC.

Within 90 days of a request to the CSRC by the SEC, or within 45 days after the CSRC receives notice of the Division's request, whichever is later, the firm will provide an initial declaration to the Division explaining that the responsive documents have been provided to the CSRC for production to the SEC. The declaration also will identify whether documents have been withheld based on U.S. privilege or Chinese law. Firms are also required to notify the CSRC in writing when they are ready to provide responsive documents to the CSRC, and to facilitate the SEC's receipt of those documents as expeditiously as possible. Then, within ten days of receiving notice from the SEC that the SEC has received the documents, the firm will provide a certification of completeness to the SEC that all responsive documents were provided to the CSRC except those withheld for US privilege or under China law. The firm must also include with the certification all requests made by the CSRC to the firm for the documents, together with English translations, and include in the certification a description of the search conducted for responsive documents and the "process" employed to determine whether information should be withheld.

Importantly, the settlement also provides the SEC with alternative forms of relief if it is dissatisfied with Respondents' document production. First, the Order provides that if the Division believes that two or more of its requests made "collectively" to the firms are not met with "a materially complete production and/or an adequate privilege log, withholding log, initial declaration, and/or certification of completeness," then the Division may recommend that the stay of the underlying action be terminated and the proceedings reinstated. In addition, the Division may also recommend that the stay be terminated if, with respect to two or more requests, "a substantial number of documents" have been withheld without justification, or if, in the Division's view, "its receipt of a production has been substantially delayed."

In addition to restarting the proceeding, as described above, the Commission may also institute summary proceedings against a Respondent for deficient productions. Under this procedure, the Division must give the relevant Respondent 20 days to cure the alleged deficiency. If, in the Division's view, the deficiency has not been cured, then the Commission may institute a summary proceeding for the purpose of determining whether the Respondent's response to the Division's request was "inadequate," whether "U.S. privilege justifies the withholding of any responsive information," or whether a production made to the CSRC was "otherwise materially complete." These summary proceedings will be adjudicated by an Administrative Law Judge within 180 days and, if decided against the Respondent, could result in a partial or complete bar on appearing or practicing before the Commission, a censure, and/or "a monetary penalty up to U.S. $750,000 per offense."  

Finally, the settlement also provides for the imposition of an automatic six-month practice bar if a firm does not provide the initial declaration or the certification of completeness as required under the new procedures. This circumstance also requires the Commission to first allow for a 20 day cure period, but if the deficiency has not been cured then the Commission can determine that the Respondent has not complied with its obligations under the Order, and will enter an order that partially denies the Respondent the privilege of practicing or appearing before the Commission for a period of six months. This six-month bar would prevent the firm from issuing an audit report, serving as a principal auditor, and "playing a 50% or greater role in the preparation or furnishing of an audit report for any issuer."

Orrick represents Ernst & Young Hua Ming LLP in the case.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.