The US Security and Exchange Commission (SEC) has accepted the settlement agreement offered by the Chinese firms of the Big Four to halt the current proceedings for their refusal to hand over the audit work of Chinese clients listed on US stock exchanges.
Deloitte, EY Hua Ming, KPMG Huazhen and PwC Zhong Tian faced a six-month suspension from practicing before the SEC since January 2014, which was subsequently appealed on the grounds of a possible conflict between US and Chinese securities laws.
The SEC granted also several extensions to allow for the discussion of an out-of-court settlement throughout 2014. Especially, after the SEC received some of the requested audit work through the China Securities Regulatory Commission (CSRC), its counterpart.
The current settlement halts the proceedings against the Big Four but not against BDO China Dahua, which wasn’t part of the settlement offer.
The Big Four will pay $500,000 each acknowledging that they did not produce the documents upon the SEC’s request, thus violating the Sarbanes-Oxley Act, but "without admitting or denying" other findings.
In addition the settlement imposed on the Big Four the obligation to comply with similar requests for documents that the SEC could issue in the next four years.
Otherwise the SEC can resume the current proceedings, start a fresh one or impose an automatic six-month bar on the firm.
The SEC enforcement division director Andrew Ceresney said the settlement showed the recent progress in obtaining documents from registered firms in China.
"The settlement also holds four of the firms accountable for previously violating US rules, and makes clear that should production of documents cease, the SEC can restart the administrative proceeding," Ceresney said.
Prior to the announcement by the SEC, Pekin University accountancy professor Paul Gillis wrote in his blog that a deal between Chinese regulators and the SEC and PCAOB should be in place before such a settlement with the accountancy firms could be reached.
"US regulators would be foolish to let the Big Four off the hook before they get such a deal," Gillis wrote.
Gillis argued that the crux of the question regarding the cross-border cooperation is that China had refused to allow the firms to turn over the audit work to the SEC or PCAOB, and therefore any deal needed to be struck with Chinese regulators and not with the accounting firms.
Regarding the penalty of $500,000 to each of the Big Four, he wrote:
"If you accept the firm’s arguments that they were caught between a rock and a hard place when deciding whether to break either Chinese or US law, then no penalty would be appropriate."
He continued: "If you buy the judge’s argument that if the firms had found themselves in such a place because it was their own decisions (to accept clients when they knew that they might be breaking US law) that put them there, then the penalties need to be much larger."
Update: SEC’s settlement with the Chinese Big Four does little for investors, Professor Gillis