A US Securities and Exchange Commission (SEC) judge has ruled that all of the Big Four Chinese joint ventures had violated the Sarbanes-Oxley Act, and that they should be banned from working for any US-listed Chinese companies for the next six months.
This ruling is the latest event in a long regulatory battle which dates back to December 2012, when the SEC triggered legal proceedings against all four joint ventures (Ernst & Young Hua Ming, KPMG Huazhen, Deloitte Touche Tohmatsu, and PwC Zhong Tian) as well as BDO Chinese firm DaHua, for refusing to produce audit work papers and other documents related to China-based companies under investigation for potential accounting fraud against US investors.
Both the Sarbanes-Oxley Act and SEC Act require foreign public accounting firms to provide the regulator with audit work papers involving any company trading on US markets upon request.
However at the time all firms involved in the case claim that such demands are in violation of Chinese secrecy laws and were unable to turn over audit working papers requested by the SEC in several fraud investigations.
The ban issued by judge Cameron Eliot earlier this week will not begin until the SEC enters an order of finality, which would prevent Chinese firms of Deloitte, PwC, EY and KPMG to audit the accounts of the Chinese companies listed in the US, of which there are more than 100.
If the ban is finalised by the SEC all these companies will have to seek alternative Chinese accounting firms which are registered with US Authorities.
In a joint statement the Big Four said that the decision was "neither final nor legally effective until reviewed and approved by the full US SEC Commission. The firms intend to appeal and thereby initiate that review without delay".
"The firms are heartened by the significant progress on information sharing between the Chinese and US regulators over the past year, which the firms have worked hard to support," the joint statement added. "The firms continue to support this co-operative working relationship and believe it is in the best interests of all parties."
Also concerned by the ruling, BDO DaHua was censured but not banned. However DaHua left BDO in April 2013.
Many thought that when the US Public Company Accounting Oversight Board (PCAOB) and its Chinese counterpart and the Chinese Ministry of Finance signed a Memorandum of Understanding in May 2013 relations between Chinese and US regulators would be smoother.
The MoU aimed at providing a mechanism for the parties to request and receive from each other assistance in obtaining documents and information in furtherance of their investigative duties.
Accounting Professor Paul Gillis wrote on his Chinese accounting blog that with this ruling "the SEC appears to be signaling to Chinese regulators that it is willing to deploy the 'nuclear option', for six months anyway".
Gillis concluded his blog post on the topic by saying that "the only way this gets settled is if China agrees that companies that list in the US are subject to all US securities laws."
Related links:
PCAOB and Chinese regulator sign MoU
SEC steps up China audit work paper dispute