SEC judge bars global auditors’ Chinese JVs

SEC judge bars global auditors’ Chinese JVs

January 23, 2014 4:14 am
By Josh Noble and Paul J Davies in Hong Kong
The Big Four global auditing firms have vowed to appeal a decision by a US Securities and Exchange Commission judge to ban their Chinese joint ventures from working for any US-listed Chinese companies.
SEC administrative trial judge Cameron Eliot ruled late on Wednesday that all four joint ventures – Ernst & Young Hua Ming, KPMG Huazhen, Deloitte Touche Tohmatsu, and PwC Zhong Tian – had violated the Sarbanes-Oxley Act, and said they should be barred from practising in the US for six months.
The SEC ruling is the latest twist in a long-running battle between US and Chinese regulators over access to company documents of Chinese companies listed in New York.
The four accountancy firms released a joint statement announcing their intention to appeal the judgment.
Accounting expert Professor Paul Gillis noted that parts of the judgment were redacted because they reported interactions between the SEC and China Securities Regulatory Commission “more candidly than is customary in diplomatic circles”.
The Big Four – EY, PwC, KPMG and Deloitte – have refused to turn over audit working papers requested by the SEC in several fraud investigations, as they say such a move would violate Chinese law.
The SEC has already banned some smaller US accounting firms for performing audit work for “botched” audits on a number of US-listed Chinese companies.
The ban for the Big Four does not come into effect immediately, but if finalised by the SEC all four joint ventures would be unable to audit the accounts of the Chinese companies listed in the US, of which there are more than 100.
These companies will be forced to hire new accounting firms in China, of which there are about 50 registered with US authorities.
Many Chinese companies that listed in the US did so through reverse mergers, buying a listed shell company. This method was seen as a short-cut to American stock markets and became notorious after several companies were targeted by short-sellers and a number proved to be frauds.
In their joint statement, the Big Four said: “It is regrettable that the SEC’s administrative law judge has recommended sanctions against the big four firms in China for failing to produce work papers to the SEC in circumstances where such production would have violated Chinese law and regulations. However, the firms note that the decision is neither final nor legally effective unless and until reviewed and approved by the full US SEC Commission. The firms intend to appeal and thereby initiate that review without delay.”
“This has significantly upped the ante in the regulatory battle between the US and China”, Professor Gillis wrote on his China accounting blog. “The SEC appears to be signalling to Chinese regulators that it is willing to deploy the ‘nuclear option’, for six months anyway.”
Observers had thought the spat between the US and China over accounting had been settled after the US Public Company Accounting Oversight Board PCAOB, China’s finance ministry, and the CSRC signed a memorandum of understanding last year.