The Securities and Exchange Commission (SEC) has ruled that the Chinese affiliates of the Big Four accounting firms (Ernst & Young, KPMG, PricewaterhouseCoopers, and Deloitte Touche Tohmatsu) may not audit US listed companies, a decision that will create significant difficulties for Chinese companies listed in the US and US companies with major Chinese operations, reports Kathy Chu for The Wall Street Journal.

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Big Four affiliates will continue services for now

The decision won’t go into immediate effect, and for now the Big Four firms have said that they will continue to provide auditing services to their Chinese clients while they appeal the ruling, but if their appeal is unsuccessful it will result in a six month suspension of auditing services. Since companies have to be audited to be listed on a US exchange, people are concerned that this could be a backdoor method of Chinese companies, a move that could not only disrupt business and put shareholder’s investments at risk but increase tension between the two countries as they try to work out cross-border enforcement strategies.

“We feel deep regret over the penalties levied on the accounting firms by the U.S. against a backdrop of smooth cooperation between the two regulators,” said China Securities Regulatory Commission Deng Ge. “The SEC should take full responsibility for the possible outcomes of the ruling.”

Affiliates prevented from cooperating with the SEC

The ruling comes in the wake of numerous accounting scandals involving Chinese companies that used affiliates of the Big Four accounting firms for their independent audits. The SEC wants detailed information on those audits turned over for investigation, but the firms have responded that many of the requested documents are considered to be state secrets and cannot be turned over under Chinese law. Investors have become more skeptical of Chinese companies.

The last round of scandals has already caused some investors to grow wary of Chinese firms listed in the US, and this episode could introduce even more doubt about their books, causing stock prices to drop. Even if no one gets delisted, as long as the Big Four affiliates are prevented from fully cooperating with the SEC, investors have to take the risk of future regulatory/political fights hurting their portfolio into account.