WASHINGTON (Reuters) – A top securities regulator said U.S. criminal authorities are investigating accounting irregularities at Chinese companies listed on U.S. stock exchanges.
"There are parts of the Justice Department that are actively engaged in this area," said Robert Khuzami, director of enforcement at the U.S. Securities and Exchange Commission.
In an interview with Reuters this week, Khuzami revealed that a number of federal prosecutors around the country are looking into the issue, but declined to name them.
The involvement of the Justice Department adds investigative firepower to the SEC and the FBI, which are also probing Chinese accounting fraud.
"I think that you will see greater (Department of Justice) involvement as time goes on," said Khuzami, a former federal prosecutor himself, when asked why no criminal charges have yet been filed in the massive Chinese accounting scandal.
He declined to elaborate on which Chinese companies or auditors the Justice Department may be targeting.
The SEC has been investigating accounting fraud in U.S.-listed Chinese companies for more than a year and has suspended trading by numerous companies after their auditors resigned. The agency has struggled to gain access to documents it needs to investigate the cases because strict Chinese laws have made auditors reluctant to turn over work papers.
The SEC has also worked closely with the FBI, which has an embedded agent at the SEC who sits on a working group on Chinese companies that enter the stock market through so-called reverse mergers with U.S. shell companies.
Officials from the SEC and the Public Company Accounting Oversight Board (PCAOB) are due to meet with their Chinese counterparts in Washington next month for a second round of talks on joint inspections of auditing firms in China.
"Not having proper accounting and reliable audit review for publicly traded companies with operations in China is just not acceptable. We have to find a path to resolution of this issue," Khuzami said. "It is ... a big issue for us."
The SEC earlier this month sought a federal court order to force the Shanghai arm of accounting giant Deloitte to turn over its work papers on possible fraud at Longtop Financial Technologies Ltd.
Longtop is among dozens of U.S.-listed companies based in China that have been caught up in accounting scandals that have resulted in billions of dollars in losses for U.S. investors.
The results of the Deloitte subpoena enforcement action will be closely watched by other auditing companies, Khuzami said. The federal government is also pursuing other options to ensure better accounting practices at U.S.-listed companies based in China, he said.
"Obviously, the results here will inform the conduct of others that are similarly situated. In that sense, it's going to be instructive," Khuzami said. "At the same time, we're not a one-trick pony; There are other efforts to reach resolution of these issues. We continue to work closely with our regulatory counterparts in China and in other countries to find a path to resolution."
In a recent interview with Reuters, Assistant Attorney General Lanny Breuer, head of the Justice Department's criminal division, underscored the government's commitment to fighting accounting fraud of any kind. He declined, however, to comment on specific cases that could be brought against Chinese firms listed in the United States.
The Justice Department declined comment, saying it does not confirm or deny investigations.
In any criminal case, the question would be whether the company lied to the auditor, or whether the auditor acted recklessly or knowingly in not detecting the alleged fraud.
Merely not providing records under these circumstances -- as in the Deloitte case -- would not likely rise to the level of criminal violation, Khuzami said.
The PCAOB, a private, non-profit corporation that oversees auditors of public companies, has inspection authority over auditing firms, while the SEC has enforcement authority over those companies.
Together, the two agencies have greater leverage over auditing firms than do criminal authorities, Khuzami said.
(Reporting by Andrea Shalal-Esa and Sarah N. Lynch; editing by John Wallace)
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