‘Big Four’ vow to ap­peal US sus­pen­sion rul­ing

China Daily (Canada) - - BUSINESS - By WEI TIAN in Shang­hai weitian@chi­na­di­aly.com.cn

The Chi­nese units of the “Big Four” ac­count­ing firms said on Thurs­day they in­tend to ap­peal a rul­ing that could sus­pend their op­er­a­tions in the United States for six months. They promised their ser­vices to clients won’t be in­ter­rupted.

The firms’ joint state­ment fol­lowed a rul­ing on Wed­nes­day by Cameron El­liot, an ad­min­is­tra­tive law judge with the US Se­cu­ri­ties and Ex­change Com­mis­sion, in­volv­ing the Chi­nese units of Deloitte Touche Tohmatsu Ltd, Ernst & Young, KPMG and Price­wa­ter­house­Coop­ers LLP.

El­liot rec­om­mended that the four be barred from pro­vid­ing au­dits for US-traded com­pa­nies for six months. They had re­jected the US reg­u­la­tor’s de­mand for ac­cess to au­dit doc­u­ments.

In the joint state­ment, the ac­count­ing firms said the SEC judge’s sanc­tions were “re­gret­table”, ex­plain­ing that pro­duc­tion of au­dit pa­pers “would have vi­o­lated Chi­nese law and reg­u­la­tions.”

“How­ever, the firms note that the de­ci­sion is nei­ther fi­nal nor legally ef­fec­tive un­less and un­til re­viewed and ap­proved by the full US SEC. There­fore, the firms in­tend to ap­peal and thereby ini­ti­ate that re­view without de­lay,” ac­cord­ing to the state­ment.

“In the mean­time, the firms can and will con­tinue to serve all their clients without in­ter­rup­tion,” it said.

Data from the Chi­nese In­sti­tute of Cer­ti­fied Pub­lic Ac­coun­tants show the “Big Four” re­ported com­bined rev­enue in China of 10.6 bil­lion yuan ($1.75 bil­lion) in 2012.

El­liot also cen­sured a fifth firm, Dahua, pre­vi­ously a mem­ber of the BDO in­ter­na­tional net­work, but without im­pos­ing a six-month sus­pen­sion.

For years, the SEC has been ask­ing the “Big Four” to hand over the au­dit work pa­pers cov­er­ing Chi­nese com­pa­nies listed on US ex­changes, some of which have been in­volved in ac­count­ing scan­dals. But the firms have re­peat­edly de­clined to share their au­dit work and urged the SEC to pur­sue a diplo­matic so­lu­tion with China in­stead.

Ac­cord­ing to Reuters, US Trea­sury Sec­re­tary Jack Lew an­nounced last July that an agree­ment had been reached by which Chi­nese reg­u­la­tors would hand over some of the au­dit doc­u­ments of USlisted Chi­nese com­pa­nies to the SEC.

But the judg­ment sheet shows that not all the doc­u­ments the SEC de­manded were handed over, which was a rea­son for the judge’s rul­ing.

“Such an es­ca­la­tion in a long-run­ning dis­pute is very un­for­tu­nate,” said Tao Jingzhou, man­ag­ing part­ner of Dechert LLP’s Asian prac­tice.

Al­though the “Big Four” have de­cided to ap­peal, Tao said the ap­peal process could last years, which will be dis­rup­tive for both Chi­nese com­pa­nies with a US pres­ence and multi­na­tional com­pa­nies with a Chi­nese pres­ence.

If the judge’s rul­ing is ap­proved by the com­mis­sion, about 200 US-listed Chi­nese com­pa­nies will have to find new ac­count­ing firms to re­place the “Big Four”, which would be a dif­fi­cult task be­cause of the limited choice of el­i­gi­ble Chi­nese au­di­tors in the US and their lack of com­pe­tence.

The move may also dampen the en­thu­si­asm among Chi­nese com­pa­nies for list­ings in the US, which were ex­pected to heat up this year.

Bao Fan, chief ex­ec­u­tive of­fi­cer of China Re­nais­sance Cap­i­tal In­vest­ment Inc, said shares of US-listed Chi­nese com­pa­nies may col­lapse on the news. He also sug­gested the Hong Kong mar­ket and A-share mar­ket should do more to help Chi­nese com­pa­nies list in the do­mes­tic mar­ket to avoid the “shack­les” of the US mar­ket.

Zhu Weiyi, a pro­fes­sor at the China Univer­sity of Po­lit­i­cal Science and Law, wrote in a com­men­tary that pro­fes­sional firms re­fus­ing to turn in work pa­pers wasn’t a prac­tice unique to the “Big Four”, nor had it started in China.

“It’s a com­mon thing for in­vest­ment banks and law firms in Wall Street of­ten to de­cline to hand over their work pa­pers to reg­u­la­tors.

“Some­times they would even just de­stroy the doc­u­ments. The ac­count­ing firms would do it any­way, even if not re­quired by Chi­nese law,” Zhu said.

“The sanct ions were also largely be­cause of an in­creased level of lo­cal­iza­tion of the “Big Four” in China,” he wrote.

“Chi­nese reg­u­la­tors have told for­eign ac­count­ing firms to in­crease their pro­por­tion of lo­cal part­ners, so US reg­u­la­tors could have less sym­pa­thy in deal­ing with the case.”

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