The Securities and Exchange Commission (SEC) might end up delisting all the Chinese companies involved in the fraud investigation if the agency fails to reach an agreement with Chinese regulators on cross border access to audit work papers and other related documents, according to Paul Gillis, adviser to the U.S. Public Company Accounting Oversight Board (PCAOB), and professor at Peking University Guanghua School of Management.
Gillis made the comment after the SEC formally filed an administrative complaint against the China affiliates of the five big accounting firms; including Deloitte Touche Tohmatsu Certifies Public Accountants Ltd, Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), PricewaterhouseCoopers Zhong Tian CPAs Limited, and China Dahua Co. Ltd.
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The five accounting firms argued that China’s law prevents them from being able to comply with the SEC demands and provide audit documents related to its investigation on potential fraud against investors by several Chinese companies trading in the United States markets. The agency aims to resolve concerns that fraud wiped out sixty one percent (61%) of Chinese and HongKong stocks traded in the U.S. markets since 2011.
Professor Gilles said, “I don’t think there’s a resolution in sight. “China is hypersensitive to the idea of foreigners operating within its borders and enforcing foreign law. The next step is likely to be the PCAOB trying to de-register accounting firms it can’t inspect. It’s eventually all leading to the de-listing of Chinese firms in the U.S.”
A report from Bloomberg cited that the SEC, PCAOB, China’s Ministry of Finance, and the China Securities Regulatory Commission failed to resolve issues related to the investigation of audit documents. The law in China restricts the removal of audit documents offshore, and foreign regulators are prohibited from conducting their investigation inside China.
The accounting firms charged with administrative proceedings could face serious sanctions, such as temporary or permanent de-registration in the United States, if they can’t comply with the SEC demands. The Chinese affiliates of the accounting firms were responsible for signing off 26 percent of the 159 Chinese companies involved in reverse mergers from 2007 to 2010.
According to PricewaterhouseCoopers spokesperson, Caroline Nolan, the SEC fraud investigation is a profession-wide issue, citing that the complaint was filed against the five audit firms. Nolan said, “The fact that the action is being taken collectively against all of the four largest audit firms and one other firm demonstrates that this is a profession-wide issue. For its part, PwC China has cooperated with the SEC at every opportunity. However, PwC China will, and must, comply with its legal obligations under China law.”
On the other hand, Nina Mehra spokesperson from KPMG China, is hoping that the discussion between China and U.S. regulators will be able find diplomatic resolution.
Meanwhile, Deloitte spokesperson Lauren Mistretta said the SEC fraud investigation should be resolved on a profession-wide basis. According to her, “We stand ready to assist that effort in any way we can.”
James R. Doty, chairman of PCAOB believes that the regulators in China have every reason to address the issues on transparency and provide access to audit documents. Doty said, “I continue to believe the Chinese regulatory authorities have every reason to resolve these issues of transparency and access to audit work papers. There is no question we are nearing a crossroads, a decision point.”
PCAOB will “need to consider other alternatives to protect the investing public” if the U.S. and Chinese regulators fail to reach an agreement to resolve the issue, according to Doty.