Tags: SEC | China | stock | fraud

SEC Cracking Down on Chinese Stock Scams

Thursday, 06 Dec 2012 07:59 AM

By Michael Kling

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The Securities and Exchange Commission (SEC) is fighting to counter waves of Chinese stock fraud even as the Chinese government strives to protect the scam artists.

The SEC has charged the Chinese affiliates of the five large U.S. accounting firms with violating securities laws for refusing to provide documentation of China-based companies being investigated for accounting fraud against U.S. investors.

The SEC's actions against the wave of "red collar crimes" put the United States and China on a collision course, according to Forbes. The Chinese government insists that Chinese auditors should not cooperate with foreign regulators, even if they work for affiliates of major international firms, and is blocking American regulators from investigating accounting firms in China.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

A plethora of Chinese firms could eventually be delisted from American stock exchanges in a bitter financial fracas, Forbes predicts.

Forbes charges that financial fraud is widespread and endemic among Chinese companies. China-based companies with bogus financial data or non-existent companies are being listed on U.S. markets by backdoor initial public offerings, reverse mergers and other tricks.

By one count, American investors’ losses had already totaled $34 billion by last year, Forbes says.

China-based firms are keeping the SEC busy. The agency has deregistered securities of nearly 50 companies and filed fraud cases involving more than 40 foreign issuers and executives.

“Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud,” said Robert Khuzami, the SEC’s enforcement director. “Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions."

The Sarbanes-Oxley Act, the SEC notes, requires foreign public accounting firms to hand over audit documents involving any company trading on U.S. markets.

The firms charged by the SEC include BDO China Dahua, Deloitte Touche Tohmatsu, Ernst & Young Hua Ming, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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