'Big Four' vow to appeal US suspension ruling

The Chinese units of the "Big Four" accounting firms said on Thursday they intend to appeal a ruling that could suspend their operations in the United States for six months. They promised their services to clients won't be interrupted.

The firms' joint statement followed a ruling on Wednesday by Cameron Elliot, an administrative law judge with the US Securities and Exchange Commission, involving the Chinese units of Deloitte Touche Tohmatsu Ltd, Ernst & Young, KPMG and PricewaterhouseCoopers LLP.

Elliot recommended that the four be barred from providing audits for US-traded companies for six months. They had rejected the US regulator's demand for access to audit documents.

In the joint statement, the accounting firms said the SEC judge's sanctions were "regrettable", explaining that production of audit papers "would have violated Chinese law and regulations."

"However, the firms note that the decision is neither final nor legally effective unless and until reviewed and approved by the full US SEC. Therefore, the firms intend to appeal and thereby initiate that review without delay," according to the statement.

"In the meantime, the firms can and will continue to serve all their clients without interruption," it said.

Data from the Chinese Institute of Certified Public Accountants show the "Big Four" reported combined revenue in China of 10.6 billion yuan ($1.75 billion) in 2012.

Elliot also censured a fifth firm, Dahua, previously a member of the BDO international network, but without imposing a six-month suspension.

For years, the SEC has been asking the "Big Four" to hand over the audit work papers covering Chinese companies listed on US exchanges, some of which have been involved in accounting scandals. But the firms have repeatedly declined to share their audit work and urged the SEC to pursue a diplomatic solution with China instead.

According to Reuters, US Treasury Secretary Jack Lew announced last July that an agreement had been reached by which Chinese regulators would hand over some of the audit documents of US-listed Chinese companies to the SEC.

But the judgment sheet shows that not all the documents the SEC demanded were handed over, which was a reason for the judge's ruling.

"Such an escalation in a long-running dispute is very unfortunate," said Tao Jingzhou, managing partner of Dechert LLP's Asian practice.

Although the "Big Four" have decided to appeal, Tao said the appeal process could last years, which will be disruptive for both Chinese companies with a US presence and multinational companies with a Chinese presence.

If the judge's ruling is approved by the commission, about 200 US-listed Chinese companies will have to find new accounting firms to replace the "Big Four", which would be a difficult task because of the limited choice of eligible Chinese auditors in the US and their lack of competence.

The move may also dampen the enthusiasm among Chinese companies for listings in the US, which were expected to heat up this year.

Bao Fan, chief executive officer of China Renaissance Capital Investment Inc, said shares of US-listed Chinese companies may collapse on the news. He also suggested the Hong Kong market and A-share market should do more to help Chinese companies list in the domestic market to avoid the "shackles" of the US market.

Zhu Weiyi, a professor at the China University of Political Science and Law, wrote in a commentary that professional firms refusing to turn in work papers wasn't a practice unique to the "Big Four", nor had it started in China.

"It's a common thing for investment banks and law firms in Wall Street often to decline to hand over their work papers to regulators.

"Sometimes they would even just destroy the documents. The accounting firms would do it anyway, even if not required by Chinese law," Zhu said.

"The sanctions were also largely because of an increased level of localization of the "Big Four" in China," he wrote.

"Chinese regulators have told foreign accounting firms to increase their proportion of local partners, so US regulators could have less sympathy in dealing with the case."