SEC rethinking auditing penalties, lawyers say

'Big Four' affiliates might escape ban threatened by US securities commission

The final penalties imposed on the Chinese affiliates of the Big Four auditors may not be as severe as United States regulators had previously implied, lawyers said on Tuesday.

The US Securities and Exchange Commission has accused the accounting firms' China joint ventures of withholding audit documents of US-listed Chinese companies and threatened to impose a six-month ban on their services. Such a ban would force more than 200 Chinese companies listed in the US to find new auditors.

"There is a good chance for the commission to reverse or to make the decision not so harsh," said Roel Campos, partner of the Texas-based law firm Locke Lord LLP.

"Because the commissioners' duty is to protect US markets, to make a decision that potentially takes away the participation of important players such as the Chinese companies will also hurt US investors and have a significant impact on the entire market," Campos said.

Signs emerged last week that the two-year dispute over access to audit documents was nearing an end, after the SEC granted a 90-day extension requested by the accounting firms and the agency's own enforcement division for an appeal briefing.

According to a statement from the SEC, the extension will help "continued settlement efforts".

Chinese companies listed in the US should have a voice as well, legal advisers suggested.

Scott E. Bartel, partner of Locke Lord, said a better understanding of US market rules will help Chinese companies safeguard their interests.

The Zhongguancun Listed Companies Association, an industry group, has already submitted a request to act as an amicus curiae, or "friend of the court", to help the auditors win the case.

The amicus curiae status will bring opinions of the Chinese companies to the judges and raise awareness of aspects of the case that the court might otherwise have not considered, explained Campos.

The Beijing-based association had 224 member companies as of the end of 2013, of which 65 were listed in the US.

Estela Kuo, deputy secretary-general of the association, told China Daily that it would be the first time for a Chinese mainland entity to play such a role in a US regulatory proceeding.

US-listed Chinese companies outside the Zhongguancun area are being encouraged to join the organization in order to best inform the court of the complexities of the case, said Kuo.

In 2012, the SEC commenced administrative action against the accounting firms hired by Chinese companies after a number of failed attempts to obtain company information for accounting fraud investigations.

Lawyers from both nations urged a deep government-to-government dialogue in order to bridge the law differences that some say have hampered Chinese companies seeking a US public offering.

Industry insiders said the ban, which would hurt US-listed Chinese companies (mostly Internet and technology enterprises), has nothing to do with discrimination, despite media reports in China suggesting otherwise.

Unlike short sellers who seek to profit from pushing down the value of Chinese stocks, the SEC is trying to maintain the integrity of US equity markets, said Bartel.