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Securities & Derivative Litigation

ALJ Bars the Big Four’s China Units from SEC Practice for Six Months

By Candice M. Tewell
April 2014
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On Jan. 22, 2014, SEC Administrative Law Judge Cameron Elliot issued a strongly worded ruling censuring the “Big Four” China accounting firms. They are Ernst & Young Hua Ming LLP, KPMG Huazhen, Deloitte Touche Tohmatsue CPA Ltd., and PricewaterhouseCoopers Zhong Tian CPAs Ltd. The ruling bars the Big Four China units from the privilege of practicing or appearing before the Commission for six months. The order also censured BDO China Dahua CPA Co., but did not bar Dahua from practice before the Commission. The ruling is suspended pending an appeal.

The dispute between the SEC and the Big Four arose when the firms failed to provide U.S. regulators with audit work papers for certain Chinese companies under investigation for alleged accounting fraud. The Big Four claimed they could not turn over the papers for fear of violating Chinese secrecy laws.

The SEC has spent years attempting to gain access to audit work conducted by Chinese accounting firms for Chinese companies that list in the U.S. markets with little success. The SEC has tried to delist or de-register some troubled companies over the years, but has stated that investigations into possible fraud were stymied by the Big Four’s failure to turn over audit work papers. After years of strained negotiations with the Big Four’s China units, the SEC decided to pursue sanctions late last year.

The judge found that a six-month bar was in the public interest and indicated that he had “little sympathy” for the firms. “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 judge did keep large portions of the 112-page order under seal to avoid adding strain to U.S.-China diplomatic ties.

The Big Four argue that the SEC is pressuring them in an attempt to influence Chinese regulators. They insist that the only way to resolve the dispute is government-to-government or regulator-to-regulator discussions between the U.S. and China.

The ruling will have little effect today, but if it is upheld on appeal, U.S.-listed Chinese companies relying on the Big Four to review their books could be in trouble. Those companies would either need to find a new auditor during the suspension period or would be unable to file accounts, which could result in a suspension of trading. Because the Big Four handle such significant accounts, companies are expected to have trouble finding enough auditors to cover their business if the bar is upheld. Companies cannot trade on U.S. exchanges or sell securities in the U.S. without audited financial statements.

The Big Four’s appeal is currently pending before the full Commission, which could uphold, overturn, or modify the judge’s ruling, or send it back for further proceedings. Any SEC decision could then be appealed up to the U.S. Court of Appeals for the D.C. Circuit.

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