BEIJING – An American judge has ruled the China arms of global accounting firms should be barred from providing audits for U.S.-traded companies in a dispute that might force major corporate names such as oil giant PetroChina and search engine Baidu to withdraw from American stock exchanges.
The dispute highlights the clash between Washington’s heightened anti-fraud efforts and Beijing’s official secrecy despite its desire to profit from broader links with the global economy.
In a ruling Wednesday, an administrative law judge for the U.S. Securities & Exchange Commission said Chinese firms affiliated with the “Big Four” accounting firms – PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young – acted improperly when they withheld documents from fraud investigators. The firms said Chinese law barred them from releasing the documents.
The judge, Cameron Elliot, recommended the firms be suspended for six months from providing audits that U.S.-traded companies must submit in order to remain on American exchanges. Elliott recommended a censure for the Chinese arm of a smaller firm, BDO, which he said has withdrawn from such auditing.
The Big Four firms said in a joint statement they would appeal. If the penalty is upheld, it might leave dozens of Chinese companies with no way to provide audits required in order to have their shares traded on U.S. exchanges.
Beijing has resisted expanding access to corporate records as a violation of its sovereignty.
The wholesale departure of Chinese companies from American stock markets would be a setback to closer financial ties between the world’s two biggest economies.
U.S.-traded Chinese companies include industry leaders such as PetroChina Ltd., Baidu Inc. and Internet portals Sina Corp. and Sohu Inc. They could shift their shares to Hong Kong or another market where Americans still could buy them. But their withdrawal from U.S. markets would leave small investors fewer options to profit from China’s rapid growth.
Elliott, the SEC judge, ruled the Chinese firms “did not act in good faith” when they provided audits to U.S.-traded companies but knew they would likely be barred from cooperating with investigators.
The judge rejected their argument that barring them from providing audits would hurt companies and investors.
The Big Four firms indicated they could continue working with Chinese clients pending the appeal.
“In the meantime the firms can and will continue to serve all their clients without interruption,” it said. “The firms are heartened by the significant progress on information sharing between the Chinese and US regulators over the past year, which the firms have worked hard to support.”
The dispute arose after the SEC asked for “work papers,” or corporate documents used by auditors to prepare financial reports, for nine U.S.-traded Chinese companies suspected of fraud.
In his ruling, Elliott noted that a smaller firm, New Jersey-based Patrizio & Zhao, handed over work papers “without complaint.”
Other governments including the 27-nation European Union also have resisted U.S. pressure for more access to corporate records but most reached compromises with Washington. That often involves joint audits by American and local regulators.
Chinese companies raised billions of dollars by selling shares to American investors since the late 1990s. Many were private companies that could not raise money on Chinese exchanges, which were created to finance state industry.
More recently, however, Beijing has encouraged companies to sell shares on China’s own exchanges to help develop its financial markets and give Chinese families better investment choices.
In a separate dispute, Washington and Beijing are wrangling over whether an accounting oversight panel created by a 2002 anti-fraud law can inspect Chinese auditors of U.S.-trade companies.
The two sides announced a deal last May giving the U.S. panel access to audit documents. However, the panel’s chairman said it did not replace the need to inspect auditors, suggesting the dispute was not settled.
U.S. Securities & Exchange Commission: www.sec.gov