On Monday afternoon, Reuters published an article by Sarah N. Lynch titled “SEC says audit firms hinder accounting fraud probes” to illustrate The U.S. Securities and Exchange Commission’s struggle to get papers out of China to investigate possible accounting fraud at dozens of Chinese companies listed on U.S. stock exchanges.
Accusation: China, for years, has resisted turning over documents because of state secrets and sovereignty concerns. Because of this, in December, the SEC charged the Chinese affiliates of Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young with securities violations.
How does the above pertain to Canadian Solar Inc. (NASDAQ:CSIQ)? According to the article, “In testimony during a hearing at the U.S. Securities and Exchange Commission, an SEC official alleged that Deloitte Touche Tohmatsu LLP's failure to turn over audit records has stalled a three-year-old probe into financial fraud at a large solar power company.”
Further, the article concentrated on describing events as “Much of the questioning in Monday's hearing focused specifically on Deloitte's audit work for the solar power company, which is referred to in the SEC's complaint as ‘Client A.’ But exhibits displayed in the courtroom on Monday revealed Client A's identity as Canadian Solar, which still trades on the Nasdaq and first disclosed the SEC's investigation in 2010.”
The author concludes with the following: “In her testimony, Josephs downplayed the audit firms' claims that Chinese secrecy laws prevent the sharing of documents, saying the agency still managed to get documents from ‘Client A’ upon request.” Furthermore, Michael Warden, an attorney representing Deloitte added that “Deloitte willingly turned over 19 boxes worth of audit papers for Canadian Solar to Chinese regulators shortly after the SEC made its request.”
In the Tuesday update, the following additional comment appeared: “This is not a new matter and Canadian Solar is not a defendant in the SEC lawsuit involving the Chinese arms of U.S. accounting firms and access to audit working papers from accounting firms," Canadian Solar spokesman David Pasquale said in an email. "Canadian Solar has fully cooperated with the SEC, including instructing our audit firm to release the working papers, and disclosed the matter in our filings."
Based on the publication of the article, investors lost 14% in stock value on Tuesday; but, was this justified?
The trial is not about Canadian Solar. In fact, Canadian Solar more than just cooperated. The documents requested were handed out, to the point that a SEC official used this reason to question the validity of the Chinese law.
Is Canadian under fraud investigation? Let’s refer to the SEC’s site for hints.
“All SEC investigations are conducted privately. Facts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods. With a formal order of investigation, the Division's staff may compel witnesses by subpoena to testify and produce books, records, and other relevant documents. Following an investigation, SEC staff present their findings to the Commission for its review. The Commission can authorize the staff to file a case in federal court or bring an administrative action. In many cases, the Commission and the party charged decide to settle a matter without trial.”
On June 1, 2010, we learned the following: “The investigation was launched after the Company received a subpoena from the Securities and Exchange Commission (‘SEC’) requesting documents from the Company relating to, among other things, certain sales transactions in 2009. The Audit Committee has retained outside counsel and independent forensic accountants to assist in reviewing, among other things, the transactions described in the subpoena. The Company has been, and intends to continue, fully cooperating with the SEC.” However, “fraud” was never mentioned.
In August 2010, the following was released as part of the first quarter release: “The Company’s audit committee has conducted an investigation into certain transactions identified in the subpoena issued to the Company by the Securities and Exchange Commission (the ‘SEC’). The audit committee has concluded that the transactions identified in the SEC subpoena were properly accounted for in the Company’s annual report on Form 20-F for the year ended December 31, 2009, filed with the SEC. Absent new information coming to light, the audit committee investigation has been concluded.”
The company has spent over $1M in audit fees during 2010 to address this matter. It was also successful in winning lawsuits based on the same event, as per a news release from April 2: “The lawsuit alleged that the Company's financial disclosures during 2009 and early 2010 were false or misleading and in violation of federal securities law. The Court found that the plaintiffs failed to adequately allege a securities law violation, and on March 29, 2013, it granted the Company's motion to dismiss all claims against all defendants with prejudice.”
In summary, Canadian Solar has fully complied with the SEC investigation, and an independent committee determined there was no violation within subpoenaed documents and turbulence caused by the lawsuits on the same were dismissed. The SEC received all the documents it needed. In subsequent 20-F releases, the investigation’s conclusion is described as unknown to the company.
To give even greater clarity and considering a timely response, Reuters today published another article, titled “China ready to hand over audit documents to U.S. regulators” with the following language: “The China Securities Regulatory Commission (CSRC) is now ready to transfer audit papers to the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB), a CSRC spokesman said, confirming local media reports. He did not identify the company whose audit documents the CSRC is turning over, or say when the handover will take place.”
Based on the above, the administrative trail against accounting firms will have no legal basis. It is worth adding that in Chinese media, the company described in the article is Canadian Solar.
