Big Four accounting firms may appeal US ban

Chinese affiliates of the "Big Four" accounting firms vowed Thursday to appeal an initial ruling by the US Securities and Exchange Commission (SEC). which orders a ban on their auditing services in the US for six months in a move experts fear may deal a blow to dozens of Chinese companies traded in the US if the ban ultimately goes into effect.

In the initial decision released late Wednesday, Cameron Elliot, the commission's administrative law judge, "censures and denies the privilege of practicing or appearing before the Commission for a period of six months" to the four Chinese units - Ernst & Young Hua Ming, KPMG Huazhen, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers Zhong Tian.

The companies "willfully" refused to submit audit work papers and other documents, traditionally requested in financial fraud investigations, the judge said.

The initial decision will not become final until the SEC enters an order of finality, according to Elliot.

"It is regrettable that the SEC's administrative law judge has recommended sanctions against the Big Four firms in China for failing to produce work papers to the SEC in circumstances where such production would have violated Chinese law and regulations," according to a joint statement from the firms sent to the Global Times on Thursday.

Noting that they intend to appeal the sanction, the statement read "in the meantime the firms can and will continue to serve all their clients without interruption."

Over the past few years, the SEC has toughened investigations into Chinese companies trading in the US due to fraud concerns, but the Chinese units of the Big Four, which perform audits for many of the Chinese companies, had not actively reacted to the SEC's request.

"The SEC is making an unexpected move with the ruling rather than an admonition," said Li Da-xiao, head of research at Yingda Securities.

If the decision stands, the suspension from auditing practices in the US is likely to suppress Chinese stocks on US markets as a whole, Cai Junyi, chief investment consultant with Shanghai Securities, told the Global Times Thursday.

"Companies could switch to non-Big Four firms and avoid any consequences. There are almost 50 Chinese CPA firms registered with the PCAOB (Public Company Accounting Oversight Board). but few, if any, have the scale and skills to audit the Big Four's clients," Paul Gillis, an accounting professor at Peking University, said on his blog shortly after the SEC's suspension ruling, pointing to the "significant effect" of the SEC decision.

Several companies that were listed on US stock exchanges were found to have committed accounting fraud in 2011, causing a slowdown in Chinese companies seeking US listing.

The latest SEC move may impact the new wave of Chinese listings in the US that were expected to return this year, in particular the booming tech shares.

The PCAOB, a nonprofit corporation created by the US Congress to oversee the audits of public companies, reached a deal in May with the China Securities Regulatory Commission and the Ministry of Finance, which clinched an exchange of investigations-related audit documents, according to the board's official website.

The PCAOB has yet to comment on the SEC ruling.

The Chinese divisions of the Big Four said in their joint statement that they have worked hard to support the significant progress on information sharing between the Chinese and US regulators over the past year.

Recognizing the risk that the ruling could strain diplomatic ties, Elliot said he decided to seal large portions of his decision that delve into Chinese-SEC relations.

"I am hopeful that the commission and the [China Securities Regulatory Commission] will continue to constructively engage one another," he wrote.