US Chamber to lobby for US-China deal after 'Big Four' defeat

Thu Jan 23, 2014 5:38pm EST

Jan 23 (Reuters) - The U.S. Chamber of Commerce plans to lobby U.S. officials to reach a diplomatic deal with China, after a judge ruled that the Chinese units of the global "Big Four" accounting firms should be suspended from auditing U.S.-listed companies for six months.

Wednesday's ruling results from the accounting firms' refusal to provide the U.S. Securities and Exchange Commission with audit documents for U.S.-listed companies based in China.

The SEC for years has been trying to get its hands on the documents, saying it needs them for investigations into a rash of accounting scandals that have plagued many Chinese companies listed in the United States.

The firms have said that handing over the documents could lay them open to criminal prosecution in China for breaching that country's secrecy laws.

U.S. officials have tried to address the dispute both through diplomatic channels and by threatening the firms with enforcement action.

The suspension does not go into effect immediately, and the firms plan to appeal the SEC administrative law judge's ruling. But the decision could eventually have far-reaching effects for companies relying on the work of these audit firms.

"Our primary concern is that if the U.S. and the Chinese regulators don't come to an agreement, the end result is ... U.S. companies can't file consolidated financial statements," Tom Quaadman, vice president at the Chamber of Commerce's Center for Capital Markets Competitiveness, said in an interview.

"We are going to call upon both parties to get back to the negotiating table and hammer out an agreement."

Quaadman characterized the judge's decision as "unfortunate." But he said the chamber, a business lobbying group, plans to hold meetings with SEC and U.S. Treasury Department officials to discuss a possible solution to the problem and hopes the ruling will just be a "speed bump in the road."

A spokeswoman for the Treasury declined to comment. A spokesman for the SEC also declined to comment.

'SAND INTO THE GEARS'

Wednesday's ruling by SEC Administrative Law Judge Cameron Elliot declared that the Chinese arms of Deloitte, PricewaterhouseCoopers, KPMG and Ernst & Young "willfully" refused to provide the SEC with the audit documents, and said the firms deserved "little sympathy."

"Respondents operated large accounting businesses for years, knowing that, if called upon to cooperate in a Commission investigation into their business, they must necessarily fail to fully cooperate and might thereby violate the law," he said.

"Such behavior does not demonstrate good faith, indeed, quite the opposite - it demonstrates gall."

The SEC and the Public Company Accounting Oversight Board (PCAOB), the U.S. audit industry watchdog, have for years pursued diplomatic talks with China, with limited success.

The SEC decided to take legal action against the firms in late 2012, after the talks broke down.

However, the judge's ruling comes after recent diplomatic efforts by Treasury Secretary Jack Lew and others had seemingly helped to thaw the frigid relationship.

At a summit in July, Lew announced that Chinese regulators were prepared to hand over some of the audit documents of U.S. listed companies.

The SEC has since confirmed through court filings in a parallel case still pending in a federal court that it has received at least 200,000 audit documents in connection with one company under investigation for fraud: Longtop Financial Technologies Limited.

Moreover, the PCAOB last spring forged a separate agreement with China to obtain some audit work to assist with investigations. The PCAOB is still hoping for additional agreements to permit cross-border inspections.

Wednesday's ruling "may have unfortunately thrown sand into the gears at the wrong time," Quaadman said.

But some experts cautioned against the notion that much diplomatic progress had been made.

"If the SEC believed the documents they were receiving were responsive to their request, they would have withdrawn this enforcement action," said Lynn Turner, a former SEC chief accountant.

Exactly how the Chinese and the SEC can break through the impasse remains to be seen.

Even if the six-month bar does ultimately stand, experts note it does not get to the heart of the problem because all of the auditors in China are facing the same dilemma.

In addition, the United States and China are pursuing different approaches to a long-term fix, experts said.

"The U.S. wants to resolve past and future cross-border issues in one go, based on current domestic laws," said James Lee, the regional director of the Institute of Chartered Accountants in England and Wales.

"China is more willing to be flexible in its approach to resolve past issues case by case and negotiate a multilateral framework for the future."