China units of Big Four accounting firms face US ban

PUBLISHED : Thursday, 23 January, 2014, 3:38pm
UPDATED : Friday, 24 January, 2014, 4:48pm

Mainland units of the global Big Four accounting firms should be suspended from practising in the United States for six months, a US judge ruled, in an escalation in the long-running dispute over the regulators' access to audit documents.

In a harshly worded 112-page ruling, Securities and Exchange Commission Administrative Law Judge Cameron Elliot censured the mainland affiliates of KPMG, Deloitte & Touche, PricewaterhouseCoopers and Ernst and Young. The four firms said that they intended to appeal against the ruling.

"In the meantime the firms can and will continue to serve all their clients without interruption," the four said in a joint statement.

Elliot, an SEC judge who operates independently, sided with the SEC and said the companies "willfully" failed to give US regulators the audit work papers of certain mainland companies under investigation for accounting fraud.

Auditors have refused to turn over such papers for fear of violating the mainland's secrecy laws.

Elliot also censured a fifth firm, Dahua, previously a member of the BDO international network, but did not impose a six-month suspension.

The decision is not expected to be disruptive to US-listed mainland companies relying on these firms to review their books for last year as the ruling does not go into immediate effect.

However, if the firms are unsuccessful in their appeal, which could last years, then companies would need to find a new auditor during the suspension period or else be unable to file accounts, a move likely to see their shares suspended.

"If the Big Four can't sign these audits, all these companies are in a hell of a pickle," said Paul Gillis, a professor of accounting at Peking University.

US multinationals with significant mainland operations such as fast food group Yum Brands, technology firm Qualcomm and construction equipment maker Caterpillar will also be watching the developments closely.

Some companies have been concerned that they could be drawn into the dispute if they use the local units of the Big Four firms to look at their operations in China.

Under rules set by the Public Company Accounting Oversight Board, the US audit industry watchdog, an audit firm needs to be registered with the watchdog if it looks over more than 20 per cent of a company's consolidated assets or revenue.

Lawyers and accountants said they were still uncertain what the SEC's ruling would mean for those audits.

"It's not clear at this stage and I understand guidance is being sought," said a senior partner at one of the firms in Hong Kong, who asked not to be named given the sensitivity of the issue.

The move by the SEC may also have an impact on a wave of Chinese listings in the US that were expected to return this year.

Just last July, US Treasury Secretary Jack Lew announced that an agreement had been reached whereby Chinese regulators would hand over some audit documents of US-listed Chinese companies to the SEC.

However, the judgment sheet shows that while some audit papers had been produced, not all the ones the SEC demanded were handed over, prompting their decision and suggesting last year's agreement had not gone as smoothly as hoped.

"This decision will be a huge shock in Beijing. The SEC has pushed a lot of chips out on the table," said Peking University's Gillis.