Jan 23 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
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
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.
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
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
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."