What’s Next for Big Four Audit Firms in China?-wsj 1/24 : 미국 법원 세계 4대 회계법인 뉴욕 증권거래소 상장 중국 법인 감사 중지 판결 파장 주요 내용

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This post originally appeared on MoneyBeat.

Buildings of the global “Big Four” accounting firms (clockwise from top L) KPMG, Ernst & Young, Deloitte & Touche and PricewaterhouseCoopers.

Reuters

A judge’s ruling sanctioning the Chinese units of the Big Four accounting firms moves the U.S. and China one step closer to what could be a stark choice.

The issue: Will the U.S. and China be able to reach agreement on how much oversight U.S. regulators should have over companies inside China, or will Chinese companies end up being barred from trading on U.S. markets?

Wednesday’s ruling by a Securities and Exchange Commission administrative law judge to suspend the Big Four’s China-based affiliates from auditing U.S.-traded companies for six months won’t immediately hurt the firms or the companies they audit. The decision came after the firms refused to give the SEC documents about some of their Chinese clients to aid the commission in investigating those companies for possible fraud.

The firms say they can’t cooperate with the SEC because strict Chinese laws prevent them from doing so.

The suspension could affect the audits of dozens of Chinese companies and some U.S.-based multinationals with significant operations in China, but not right away. The suspension might not take effect for months or years. The firms have 21 days to appeal Judge Cameron Elliot’s ruling to the five-member commission itself before it takes effect, and they’ve indicated they plan to do so.

The commission can then uphold, reverse or modify the judge’s ruling, or send it back to him for further proceedings. The commission’s decision can then be appealed further, to the U.S. Court of Appeals in Washington.

Still, despite the expected delay, accounting experts said the ruling was another step down the road toward a final reckoning with a broader, fundamental dispute: The U.S. wants to regulate and investigate China-based companies that trade on U.S. markets, but China has put up roadblocks to those efforts, especially with regard to the China-based audit firms that those companies use, including affiliates of the Big Four – PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young.

Subsequent to the SEC filing its case, the U.S. and China reached an agreement that enabled U.S. regulators to get some of the documents they were seeking. But that wasn’t enough to satisfy the judge, who said the SEC “should have discretion to seek documents in whatever fashion the law permits.”

The accounting firms have called the ruling “regrettable” and said they “can and will continue to serve all their clients without interruption” during the appeals process.

Ultimately, there are only two choices, the experts said: Either the U.S. and China must come to some sort of lasting solution that satisfies the U.S. and is acceptable to the Chinese to allow more U.S. oversight of U.S.-traded Chinese companies – or, if they can’t, the logical end-point is that Chinese companies won’t be able to find any auditor who will act in ways acceptable to the U.S., and thus the companies would have to be delisted from U.S. trading.

“This is a very, very difficult problem,” said Joseph Carcello, an accounting professor at the University of Tennessee. “My guess is there’s going to be a global resolution.”

Fredrik Oqvist, an independent advisor who closely tracks Chinese accounting issues, said the judge’s ruling is being appealed “on the hope that a deal is reached between the (U.S. and Chinese) agencies to make the problem go away.”

The SEC filed its administrative proceeding against the firms in December 2012 after the firms refused the SEC’s request to hand over documents. The firms have argued that they are between a rock and a hard place – that they can’t comply with U.S. law that requires them to cooperate with the SEC because that would lead to them being punished under Chinese laws that treat such information about Chinese companies as akin to “state secrets.”

Judge Elliot’s 112-page ruling sided squarely with the SEC and lambasted the firms, saying they essentially have no one to blame for their predicament but themselves. They built their businesses in China knowing that they might be called upon to cooperate with the SEC and that Chinese law might interfere with that, the judge said, and yet they complained that they should be relieved of their legal responsibilities because of the money and effort they spent building their businesses.

“Such behavior does not demonstrate good faith, indeed, quite the opposite – it demonstrates gall,” the judge said.

A delay in the suspension could work to the firms’ advantage, at least in allowing them to complete their current audits without incident – annual audits are currently under way for companies whose fiscal year ended Dec. 31. Paul Gillis, a Beijing-based professor at Peking University’s Guanghua School of Management, suggested that a delay beyond the current audit window could “minimize the damage” for the firms.

In addition, China still has not allowed the Public Company Accounting Oversight Board, which regulates the U.S. audit industry, to inspect China-based audit firms to eval‎uate their performance and compliance with U.S. rules, as the board does with other firms auditing U.S.-traded companies. A PCAOB spokeswoman declined to comment on the issue Thursday.

–Michael Rapoport

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