China auditors set to appeal against US judge's ban
Accounting firms seek to reverse ruling barring them 6 months for obstructing fraud probes
An appeal by Chinese affiliates of the four largest accounting firms is expected to be lodged with United States regulators today against an administrative judge's decision to bar them for six months after they stymied investigations of possible accounting fraud.
The Securities and Exchange Commission will have to weigh the punishment just as US and Chinese regulators make strides in overcoming some of the legal conflicts that the auditors say prevented them from co-operating with probes of Chinese-based companies listed on US stock exchanges.
China has signalled that the diplomatic progress could be derailed if the SEC upholds the judge's January 22 decision. The firms said that day they would submit an appeal, which must be filed by today in the US.
The SEC filed an administrative action against the auditors in 2012 after struggling to obtain information for dozens of accounting fraud probes at Chinese-based firms.
Once a petition for review is filed by the four auditors that received the bar - Deloitte Touche Tohmatsu, Ernst & Young Hua Ming, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian - the judge's ruling is held from going into force until the SEC makes a decision.
The five-member commission approved the enforcement action before it was filed, which would make it awkward to now reverse the favourable ruling, said Daniel O'Connor, a partner at Ropes & Gray in Boston who has followed the case.
"Everyone recognises there's a need for a practical solution," O'Connor said. "Whether that means they back off from the administrative law judge's decision or not remains up for grabs."
Stephen Crimmins, a former SEC lawyer who is now a partner at law firm K&L Gates, said the SEC might hold off on making a decision until the two countries reached an agreement or discussions broke down.
The Chinese-based auditors have argued they are caught between US law, which requires them to turn over all documents requested by regulators, and Chinese law, which prohibits transferring data that might contain state secrets to foreign parties.
A compromise could be struck by giving the Public Company Accounting Oversight Board access to work papers or allowing it to meet auditors outside China, chairman James Doty said last week.
An agreement last year between the two countries allowed some co-operation, and US regulators had received documents on at least four firms, the China Securities Regulatory Commission said last month. That deal did not allow for the board to inspect audit firms in China.
The bar, if enforced, would force more than 200 Chinese companies traded in the US to find new auditors, while multinationals with operations in China would also have to bring in new firms to check those units.