U.S. regulators probing potential fraud by China-based companiesincreased pressure on their auditors by formally accusingaffiliates of Big Four firms of withholding documents frominvestigators.

Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua MingLLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAsLimited have refused to cooperate with accounting fraudinvestigations into nine companies whose securities are publiclytraded in the U.S., the Securities and Exchange Commission said inan administrative order today. The order also named BDO China DahuaCo. Ltd.

China-based companies listed on U.S. exchanges have facedincreased scrutiny over the past two years after regulators becameconcerned that some firms may not be providing accurate financialstatements to investors. Investigators have struggled to obtaindocuments central to the probes because auditors, citing China'slaws, declined to cooperate.

“Only with access to work papers of foreign public accountingfirms can the SEC test the quality of the underlying audits andprotect investors from the dangers of accounting fraud,” SECEnforcement Director Robert Khuzami said in a statement.“Firms that conduct audits knowing they cannot comply with lawsrequiring access to these work papers face serious sanctions.”

The SEC has de-registered the securities of nearly 50 companiesand filed fraud cases against more than 40 issuers and executivesas part of its investigation into the non-U.S. based issuers. Manyof the companies entered U.S. capital markets through so-calledreverse mergers, in which a closely held firm buys a shell companyalready listed on an exchange, allowing them to sell shares withoutthe scrutiny that would surround a public offering.

Earlier this year, the agency announced a separate enforcementaction against the Shanghai-based Deloitte affiliate after seekingto enforce a subpoena in federal court.

“Ernst & Young Hua Ming supports close working relationshipsbetween regulators to enable them to cooperate and shareinformation with one another,” Will White, director of global andEMEIA media relations for Ernst & Young, said in an e-mailstatement. “We hope that an agreement can be reached between U.S.and Chinese regulators that will enable our compliance with allapplicable laws and regulations.”

Geoffrey F. Aronow, an attorney for KPMG at Bingham McCutchenLLP, declined to comment. An e-mail sent after working hours toKPMG China spokeswoman Nina Mehra wasn't immediately returned.E-mails to lawyers for Deloitte and BDO weren't immediatelyreturned.

'Legal Obligations'

“The fact that the action is being taken collectively againstall of the four largest audit firms and one other firm demonstratesthat this is a profession-wide issue,” Caroline Nolan, aPricewaterhouseCoopers spokeswoman, said in an e-mail statement.“For its part, PwC China has cooperated with the SEC at everyopportunity. However, PwC China will, and must, comply with itslegal obligations under China law.”

The Ontario Securities Commission, Canada's largest financialmarkets watchdog, earlier today released a statement of allegationsagainst Ernst & Young LLP, claiming the firm didn't conductaudits of now-insolvent Chinese tree-plantation operatorSino-Forest Corp. according to accounting industry standards.

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