Chinese companies could face delisting from US exchanges

A hearing underway into Chinese operations of a few global accounting firms' alleged violations of US securities laws could lead to Chinese companies' delisting from US exchanges, ultimately hurting China's most innovative small firms and the nation's ability to compete in the global marketplace, a financial analyst says.

If a US Securities and Exchange Commission's administrative judge were to rule in favor of the SEC, the regulator could strip the accounting firms of their right to audit US traded companies, Jim Fink said. "This threat would force the US accounting firms to withdraw as auditors for Chinese companies," Fink wrote in an e-mail to China Daily. "Without an SEC-sanctioned auditor, Chinese firms would be delisted from US exchanges."

The biggest losers, Fink said, "will be private Chinese firms that will lose an important source of investor capital". Since China's biggest banks focus on lending to large state-owned enterprises, "small private Chinese companies that are the source of most innovation will suffer", the Investing Daily website editor said. "Ultimately, the Chinese economy will suffer due to a lack of competitiveness."

The SEC administrative trial, expected to last several weeks, is the US regulator's most aggressive effort yet in its standoff with Chinese regulators over access to Chinese audit papers.

Last December, the SEC sued Chinese affiliates of five top accounting firms - Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young - for failing to turn over audit information on nine unidentified US-listed Chinese companies, amid a continuing rash of accounting fraud among the group.

The accounting firms have refused to comply with SEC document demands because Chinese law views any information about domestic Chinese companies as a state secret. The SEC had previously tried to resolve its issues with Chinese regulators through talks, but filed the case against the accounting firms after negotiations collapsed.

Fink wrote last fall that the SEC's failure to name the accused companies "cast a dark cloud of uncertainty" over all US-listed Chinese companies "because investors can't be sure that any individual Chinese company isn't one of the nine under investigation".

Investigations by short-sellers such as Carson Block, operator of the Muddy Waters LLC research firm, also raised doubts about the accounting practices of Chinese-owned firms.

On Monday, as the hearing began at the SEC in Washington, US federal regulators tried to persuade a judge to sanction the Chinese arms of the accounting firms, saying their refusal to hand over audit work papers hindered investigations into fraud at US-listed Chinese firms.

In testimony during a hearing at the SEC, an SEC official alleged that Deloitte Touche Tohmatsu LLP's failure to turn over audit records has stalled a three-year-old probe into financial fraud at a large solar power company. "We've had significant delays," said Laura Josephs, an SEC assistant enforcement director, according to Reuters. She added that Deloitte was "continuing to issue audit opinions" both for that company and others, even while it failed to comply with the SEC's request.

Author Rob Koepp says the case shows that the SEC needs to stop dealing with officials who lack the authority to help it get what it wants and to start dealing with higher-ups who can.

Koepp, author of Betting on China: Chinese Stocks, American Stock Markets, and the Wagers on a New Dynamic in Global Capitalism, published by Wiley in 2012, wrote in the Wall Street Journal that the China Securities Regulatory Commission, an institution of the State Council and the main regulator of the securities industry in China, operates with "institutional constraints that strictly limit its authority".

Charles Lee, a Stanford University accounting professor, has said the SEC case could have global impact, given China's and the US' prominence as the world's two largest economies. "The relationship between China and the US is going to be key to the welfare of the entire world, and I hope we can work it out," Lee said in an interview this spring.