December 4, 2012

SEC Sues Big 4 Over China Audits

As noted in this WSJ article, the SEC brought administrative proceedings against the foreign affiliates of five auditors yesterday – the five biggest firms – alleging they refused to hand over documents sought in investigations of alleged accounting frauds at 9 Chinese companies.

This issue is not new. Auditor have refused to turn over the work papers of their foreign affiliates to the SEC for decades. Meanwhile, the markets have become much more global with many foreign companies now seeking cash and capital from the US capital markets, based upon audited financial statements audited by foreign affiliates of the Big 4. Yet the auditors have steadfastly refused to grant access to foreign work papers when questions about a lack of proper auditing have been raised. As a result, Sarbanes-Oxley included a Section 106 to remedy this problem. And now Section 106 is being used…

Meanwhile, in what is by far the largest settlement in the current wave of securities litigation involving Chinese companies, Ernst &Young, which served as the auditor for Sino-Forest, has agreed to pay $117 million to settle the securities suit that investors filed in Ontario against the accounting firm, as noted in the “D&O Diary Blog.”

Europe Seems to Be Moving Forward with Audit Firm Rotation

As noted in Jim Hamilton’s blog, a European Commission Official recently told a PCAOB Roundtable that the EU is moving forward with legislation mandating auditor rotation.

HP, Autonomy and IFRS vs US GAAP

Here’s some insight from Lynn Turner: “There has been much discussion of HP’s Autonomy transaction since the HP announcement of last week. The former Autonomy management has said the disagreement is apparently due to HP, and its experts, not adequately considering the differences in International and US Accounting standards. That seems to be unlikely as HP said their information was being supplied to both the US’s SEC and UK regulators who will be reviewing it.

Here is an article that discusses the two different accounting standards. As the article notes, IFRS is very, very general with little – if any – guidance. It has in essence been such a poor standard, that it may result in companies not following its basic principles as written and intended. If adopted for US reporting by the SEC, this is a prime example of what US investors can expect in financial statements using International Accounting Standards – unreliable information.”

As noted in this WSJ article, roughly half of the 1000 foreign companies listed on a US exchange still submit filings using U.S. standards. The SEC allows US-listed foreign companies to use IFRS standards for 5 years.

PCAOB Approves Its 2013 Budget

Last week, the PCAOB approved its ’13 budget – with a 8% hike from the prior year. The SEC now must approve it. Here is a ’13 budget summary – and the ’12-16 strategic plan.

– Broc Romanek