A US judge on Wednesday ruled that the Chinese arms of global accounting firms should be barred from providing audits for US-traded companies in a dispute that may force major corporations such as oil giant PetroChina and search engine Baidu to withdraw from US stock exchanges.
The dispute highlights the clash between Washington’s heightened anti-fraud efforts and Beijing’s official secrecy, despite its desire to profit from broader links with the global economy.
An administrative law judge for the US Securities & Exchange Commission said Chinese firms affiliated with the “Big Four” accounting companies — Pricewaterhouse Coopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young — acted improperly when they withheld documents from fraud investigators that the firms said Chinese law barred them from releasing.
Judge Cameron Elliot recommended the firms be suspended for six months from providing audits that US-traded companies must submit to remain on US exchanges. Elliott recommended a censure for the Chinese arm of a smaller firm, BDO, which he said has withdrawn from such auditing.
The “Big Four” said in a statement that they would appeal. If the penalty is upheld, it might leave dozens of Chinese firms with no way to provide the audits required to trade their shares on US exchanges.
Beijing has resisted expanding access to corporate records as a violation of its sovereignty.
The wholesale departure of Chinese companies from US stock markets would be a setback to closer financial ties between the world’s two biggest economies.
US-traded Chinese companies include industry leaders such as PetroChina, Baidu and Internet portals Sina and Sohu. They could shift their shares to Hong Kong or other markets where Americans could still buy them.
However, their withdrawal from US markets would leave small investors fewer options to profit from China’s rapid growth.
Elliott ruled that the Chinese firms “did not act in good faith” when they provided audits to US-traded companies, but knew they would likely be barred from cooperating with investigators.
The judge rejected their argument that barring them from providing audits would hurt companies and investors.
The four firms indicated they could continue working with Chinese clients, pending the appeal.
“In the meantime, the firms can and will continue to serve all their clients without interruption,” the statement said. “The firms are heartened by the significant progress on information sharing between the Chinese and US regulators over the past year, which the firms have worked hard to support.”
The dispute arose after the commission asked for “work papers,” corporate documents used by auditors to prepare financial reports, for nine US-traded Chinese companies suspected of fraud.
In his ruling, Elliott said that a smaller firm, New Jersey-based Patrizio & Zhao, handed over work papers “without complaint.”
Other governments, including the 27-nation EU also have resisted US pressure for more access to corporate records, but most reached compromises with Washington that have often involved joint audits by US and local regulators.
Chinese companies have raised billions of dollars by selling shares to US investors since the late 1990s. Many were private companies that could not raise money on Chinese exchanges, which were created to finance state industry.