SEC, Chinese Affiliates of Accounting Firms Near Settlement; Chinese Audit Firms of Big Four Accounting Firms Face Sanctions Over Document Sharing

SEC, Chinese Affiliates of Accounting Firms Near Settlement; Chinese Audit Firms of Big Four Accounting Firms Face Sanctions Over Document Sharing


Updated Feb. 4, 2015 6:25 p.m. ET

The Securities and Exchange Commission and the Chinese affiliates of the Big Four accounting firms are close to settling a high-profile dispute that had threatened to complicate the audits and fundraising capabilities of dozens of Chinese companies and U.S. multinationals, according to people familiar with the situation. The prospective settlement would sanction the Chinese audit firms for refusing to give the SEC documents about some of their U.S.-traded Chinese clients that were under SEC investigation.Under tentative terms of the settlement, the firms—the Chinese arms of PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young—would pay fines totaling about $2 million, or about half a million each, the people familiar with the situation said.

The SEC’s commissioners could vote on the settlement as soon as Thursday. Because the pact hasn’t been approved, it is possible some details may change or the vote could be delayed.

In addition to the fines, the tentative settlement tosses out a six-month suspension from auditing U.S.-traded companies that a judge had levied on the firms last year after he ruled they violated U.S. law by not handing over the documents.

Overturning the suspension should spare more than 90 Chinese clients the possibility of having to seek new auditors, at least temporarily. It also means U.S. multinationals with major Chinese operations can continue using the Chinese Big Four firms to assist with their audits, without worrying a suspension will preclude them from doing so.

But the settlement also includes a strong framework for the firms to cooperate with the SEC and for the agency to obtain audit documents in the future, the people familiar with the situation said, though the details of the framework weren’t clear Wednesday.

An SEC spokesman declined to comment. The Big Four firms either didn’t have any comment on a settlement or couldn’t immediately be reached.

The settlement, which the two sides have been discussing since last June, would bring an end to a dispute that dates to 2011.

More than 170 U.S.-traded Chinese companies have encountered questions about their accounting and disclosure in recent years—many of them audited by the Chinese member firms of the Big Four. (All of the major accounting firms are international networks made up of individual, freestanding firms in each country where they do business.)

The SEC began investigations of some of those companies and demanded documents from the audit firms in an effort to find out more about what the auditors knew about their clients.

But the Chinese firms said they couldn’t turn over the documents to the SEC because strict Chinese laws treat such documents as akin to state secrets. If they did so, the firms said, Chinese authorities might throw their auditors in jail.

The dispute went to Cameron Elliot, an SEC administrative-law judge, and in January 2014 Judge Elliot sided with the SEC enforcers and ordered the six-month suspension. The firms had “failed to recognize the wrongful nature of their conduct” in refusing to turn over documents pertaining to 10 clients that the SEC had demanded, Judge Elliot said in his ruling, and had showed “gall” in complaining that obeying the SEC’s demands would hurt them.

The suspension has been on hold while the firms appeal the ruling to the five-member SEC itself, but the commissioners have yet to hear the appeal. The SEC enforcers and the Big Four firms have pushed back their schedules multiple times, most recently in December, to allow the settlement talks to continue.

SEC investigators have continued to press their case against the firms even though U.S. and Chinese regulators had worked out a separate arrangement in 2013 that gave the SEC some of the audit documents it sought, by routing them through the Chinese regulators.

If a suspension had gone into effect, it could have caused the firms’ U.S.-traded clients to scramble for new auditors. Without audited financial statements, a company can’t sell securities in the U.S. or stay listed on U.S. exchanges.

In addition, many U.S.-based multinational companies with significant business in China use the Chinese affiliates of their main U.S.-based Big Four auditors to audit their Chinese operations. That wouldn’t have been possible during a suspension of the Chinese firms, and it isn’t clear how the companies could have solved such a problem.

Most such multinationals have remained mum about the potential effects the audit-document dispute might have had on them, but a couple have cited the dispute in recent months as a potential risk. Control-systems company Woodward Inc., which says about 7% of its sales come from China, said in its annual report in November that the sanctions “could be very serious for the Chinese audit firms with U.S. listings and U.S. companies with Chinese subsidiaries audited in China.” The company declined to comment further.


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