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UPDATE 1-SEC judge censures "Big Four" China units over audits

Sarah N. Lynch
Wednesday, 22 Jan 2014 | 7:29 PM ET

WASHINGTON, Jan 22 (Reuters) - A U.S. judge has ruled that the Chinese units of the "Big Four" accounting firms should be suspended from practicing in the United States for six months, an escalation in a long-running dispute between U.S. and Chinese regulators over access to audits.

In a harshly worded 112-page ruling, Securities and Exchange Commission Administrative Law Judge Cameron Elliot censured the Chinese units of KPMG, Deloitte & Touche, PricewaterhouseCoopers and Ernst and Young.

Elliot censured a fifth firm, Dahua, previously a member of the BDO international network, but did not impose a six-month suspension.

The judge, who operates independently from the SEC, sided with the agency and said the companies "willfully" failed to give U.S. regulators the audit work papers of Chinese companies under investigation for accounting fraud.

Wednesday's ruling does not go into effect immediately and the firms might appeal.

It is not expected to be a major disruption to U.S.-listed Chinese companies that rely on these firms to review of their 2013 books.

However, if the decision stands, it could be a "big deal" down the road, said Jason Flemmons, a senior managing director at FTI Consulting who helped bring the case against the firms when he worked in the SEC's Enforcement Division.

"I think the decision came totally unexpected to the firms," Flemmons told Reuters. "That said, this will undoubtedly be appealed, which will significantly delay the institution of the six-month bars."

Representatives for the Big Four in the United States did not have any immediate comments. A spokesman for the U.S.-based unit of BDO referred all questions to China.

LITTLE SYMPATHY

The judge's decision marks a major victory for the SEC, which for years tried with limited success to gain access to audit work conducted by Chinese accounting firms for Chinese companies that list in U.S. markets.

Several companies that have listed on U.S. stock exchanges have been plagued with accounting scandals.

The SEC has tried to delist or de-register some troubled companies, but has said investigations into possible fraud were stymied by the firms' failure to turn over audit work papers.

The accounting firms have repeatedly declined to share their audits, saying Chinese secrecy laws forbid it. They urged the SEC to pursue a diplomatic solution with China instead.

After years of often strained negotiations with Chinese regulators, the SEC decided in late 2012 to pursue sanctions against the firms.

In his ruling, Elliot said he had "little sympathy" for the firms.

"Respondents operated large accounting businesses for years, knowing that, if called upon to cooperate in a Commission investigation into their business, they must necessarily fail to fully cooperate and might thereby violate the law," he said.

"Such behavior does not demonstrate good faith, indeed, quite the opposite - it demonstrates gall."

The SEC said it was gratified by the decision, which upholds its authority.

"These records are critical to our ability to investigate potential securities law violations and protect investors," said Matthew Solomon, the chief litigation counsel in the SEC's Enforcement Division.