Here is the big question for Securities and Exchange Commission Chairman Mary Jo White, now that an administrative-law judge has suspended all of the Big Four accounting firms' China affiliates from auditing U.S.-listed companies for six months: What, if anything, is she going to do about it?
Doing nothing might be a tempting option. The firms have until mid-February to file an appeal to the full five-member commission. After that, the commission can stall as long as it wants, because it has no deadline to act. Once the firms file their appeal, the initial ruling by U.S. Administrative Law Judge Cameron Elliot won't become final until the commission affirms it. White and her colleagues might find themselves under tremendous pressure to drag out the process.
This always has been an open-and-shut case on the merits. The SEC's enforcement division filed administrative proceedings in 2012 against the Chinese affiliates of Deloitte & Touche, PricewaterhouseCoopers, KPMG and Ernst Young after they refused to comply with subpoenas for records related to their audits of 10 Chinese companies under investigation for accounting fraud. Failing to comply with SEC subpoenas isn't allowed. Case closed.
The firms argued that giving the documents to the SEC would have violated Chinese secrecy laws. But that didn't make for a good defense. If you can't follow U.S. laws, you shouldn't do business before the SEC. A fifth audit firm, BDO China Dahua CPA, was censured, but not suspended, as part of the ruling.
The problem for the commission is that if it issues a decision on the appeal, it would seem to have little choice but to affirm the judge's decision. It may not want to do so just yet, out of concern the Chinese government may retaliate. U.S. and Chinese authorities have been trying to negotiate a diplomatic solution on this and related issues, but haven't reached one yet. The ruling comes as companies with calendar fiscal years are finishing their annual reports and waiting for their auditors' signatures. The Big Four accounting firms also need their Chinese affiliates to help on audits of U.S. companies with operations in China.
"We hope the SEC will take into consideration the big picture of China-U.S. regulatory cooperation, make the right judgment to resolve the situation properly," the China Securities Regulatory Commission said. "The SEC should bear all responsibility to possible consequences arising from the decision."
Chinese stocks with U.S. stock exchange listings tumbled yesterday after the ruling came out. However, there seems to be little risk that this year's audit season will be interrupted.
The commission's guidelines say that, ordinarily, decisions on appeals of administrative-law judges' rulings should be issued within seven months, "unless the commission determines that the matter presents unusual complicating circumstances." In that case, the guidelines say the commission may have 11 months to decide. But those are general timeframes, not deadlines.
The guidelines say "the commission retains discretion to take additional time" in those instances "when the commission determines that extraordinary facts and circumstances of the matter so require." Neither the SEC's enforcement division nor the firms can compel the commission to issue a decision. So it can delay the matter indefinitely.
There is a downside to doing that, of course: It would be a clear signal that Chinese auditing firms, and perhaps others, are free to violate U.S. laws. After the many billions of dollars that U.S. investors have lost in recent years due to Chinese accounting frauds, this wouldn't be a good message for White and her colleagues to send.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)
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