SEC auditor ban could hit US companies in China

January 23, 2014 7:07 pm

SEC auditor ban could hit US companies in China

By Gina Chon in Washington

US public companies operating in China could be hit by a ruling that bans the Chinese units of the Big Four global auditing firms from working on US-listed companies for six months.

The decision by a US Securities and Exchange Commission judge on Wednesday may also give Chinese authorities an incentive to agree to certain co-operation agreements the US has been seeking, such as joint audits.

SEC administrative trial judge Cameron Eliot ruled that the four joint ventures – Ernst & Young Hua Ming, KPMG Huazhen, Deloitte Touche Tohmatsu, and PwC Zhong Tian – had violated the Sarbanes-Oxley Act by refusing to turn over documents of companiesinvestigated for accounting fraud.

The accounting firms are appealing the ruling, which will not go into effect until the case is resolved. “In the meantime, the firms can and will continue to serve all their clients without interruption,” they said.

The auditors attempted to comply with both US and Chinese laws and hand over documents to the SEC, people familiar with the matter said. But a Chinese government directive ordered the firms to send their documents directly to Chinese regulators, who would then pass it on to the SEC, according to a legal brief by the firms. This could have slowed the process.

Chinese companies listed publicly in the US will be the hardest hit by the ruling because many of them use one of the Big Four for all of their audits. But US companies doing business in China could also be affected because the ruling prevents the joint venture accounting firms from “appearing or practising” before the SEC for six months, people familiar with the matter said.

The US Public Company Accounting Oversight Board (PCAOB) rules also require an audit firm to be registered and declared on a firm’s financial statement if it handles more than 20 per cent of a company’s assets or revenue.

That means a public US firm using the Chinese affiliate of one of the Big Four accounting firms for their Chinese business may have to stop using that company if the ruling goes into effect. Specific details on how US companies should handle the matter are being worked out, people familiar with the matter said.

The SEC did not want the issue to affect US multinationals. But the judge’s ruling could have unintended consequences since the US companies would probably be better examined in China by a Big Four joint venture than a local Chinese firm. The decision could also drive other Chinese companies seeking to go public to avoid US exchanges.

The SEC and PCAOB declined to comment.

The ruling is part of a longstanding dispute between regulators in the US and China over access to documents of Chinese companies listed in the US, which now total more than 100.

The Big Four accounting firms had refused to turn over documents to the SEC, saying it would violate Chinese law. Last May, the PCAOB, the China Securities Regulatory Commission, and the Chinese Ministry of Finance agreed to co-operate on the exchange of documents related to investigations in either country.

Afterwards, the SEC had received some but not all of the documents it was seeking from the Big Four joint ventures, people familiar with the matter said. Therefore, the SEC had sought a ruling from a judge to obtain the rest of the documents.

“The Division is gratified by the [Administrative Law Judge’s] decision which upholds the commission’s authority to obtain essential records from audit firms registered in the US even when they are located overseas,” said Matthew Solomon, the SEC enforcement division’s chief litigation counsel. “These records are critical to our ability to investigate potential securities law violations and protect investors.

The ruling could provide incentives for China and the US to agree to other co-operation initiatives. The US has been seeking an agreement with Chinese authorities to conduct joint inspections of audit firms in China registered with the PCAOB, in addition to auditing Chinese companies listed on US exchanges.