• Big 4

    The SEC Bans Big 4 Member Firms in China For Failing to Show Their Work

    By | January 23, 2014

    There's a storm a-brewin' in China and isn't a "fake" sun going viral.

    In a massive 112-page opinion, SEC judge Cameron Elliot has brought the hammer down on Chinese units of Big 4 firms, ruling that these units should be barred from auditing U.S.-traded companies for six months. The ruling comes after these member firms failed to show the SEC their work.

    Tweeted Professor Paul Gillis of Peking University's Guanghua School of Management who eats this stuff up, "Reading SEC opinion banning China Big Four. Judge objects to firm's gall in some of their arguments. He seems most upset with KPMG."

    According to Gillis' comments, this news might be good for non Big 4 firms:

    The suspension will have significant effect. The Big Four cannot audit U.S. listed companies during the suspension. The worst possible time for the suspension to begin would be in the next month or two. Most of the calendar year companies file an annual report on Form 20F that requires an audit opinion. That report is due on April 30. If the firms are suspended, they cannot issue audit reports, so the clients cannot file Form 20-F. Under exchange rules, this should lead to the companies being suspended from trading since investors do not have the data they need to be able to trade. Any company planning to do an IPO using a Big Four firm as auditor is out of luck if the auditors are suspended.  

    Companies could switch to non-Big Four firms and avoid any consequences. There are almost 50 Chinese CPA firms registered with the PCAOB, but few, if any, have the scale and skills to audit the Big Four’s clients. I do expect that some of the second-tier firms like Grant Thornton, BDO, and Crowe Horwath/RSM are going to pick up a number of IPOs given the uncertainty surrounding the Big Four.

    Gillis doesn't expect U.S. member firms to head to China to clean all this up since in order to do so, the firms would have to obtain practice certificates in China, which require them to follow Chinese law, which — here we go again — forbid them from handing over documents to the SEC which is what got them in this mess in the first place.

    He suggests the best solution — at least for the firms, for now — would be to try to delay the ruling to start on May 1, which would give them a little time to finish 2013 audits except for FY companies. Hey, better than nothing.

    We knew this was coming.

    The firms will, naturally, appeal. "It is regrettable that the SEC’s administrative law judge has recommended sanctions against the big four firms in China for failing to produce work papers to the SEC in circumstances where such production would have violated Chinese law and regulations,” the firms wrote. “However, the firms note that the decision is neither final nor legally effective unless and until reviewed and approved by the full US SEC Commission. The firms intend to appeal and thereby initiate that review without delay.”

    We will be sure to keep you posted of any new developments and let you know if we come across anything fun in that 112 opinion once the interns finish reading it.

    • cool story brah

      MERICA

    • Big4Veteran

      Based on recent PCAOB inspection reports, it doesn’t appear that moving Big 4 clients over to GT, BDO and other 2nd tier firms will be an effective strategy for improving audit quality.

    • Jack

      Wouldn’t BDO, GT and any other firm be faced with the same conundrum – SEC requiring access to workpapers, Chinese law prohibiting it?

      • Another exKPMGer

        Yes, if you read Gillis’ article (and others also) most make reference to the same problem – those firms are going to ultimately be in the same boat as the Big 4. Apparently there are about 50 firms in China registered with the PCAOB, but how many of them other than BDO/GT etc. are big enough to audit huge multinationals? In addition, if you read the opinion BDO’s Chinese arm was included in this whole mess, but they have since spllit with BDO and they have no US registrants now, so the judge censured them but didn’t ban them because there was no activity to ban. So since they went after BDO’s Chinese firm, they’d gladly go after GT or anyone elses. I work for a huge multinational with significant Chinese operations and we’re interested to see how this plays out for our auditors b/c in theory they can’t rely on anything the Chinese firm provides them in forming their opinion for our 10-k. It seems like they’d have to issue a disclaimed opinion due to scope restrictions if they can’t rely on the Chinese work. I guess we’ll see who blinks first, the SEC or China.

    • Miss India

      OMG! Here we go again with America thinking it rules the world. China could fart and blow over America’s crumbling economy and still America thinks they are in charge. Sad really. 🙁

      • AccountingNinja

        I’m pretty sure we do rule the world when it comes to auditing US listed companies.

        • Miss India

          OMG! US auditors are as dimwitted as their audit standards! You’re sure you rule the world? Do you have workpapers for that? HAHAHA! Sad really. 🙁

          • AccountingNinja

            The A (as in America) series clearly documents our relationship with ruling the world, without material exception.

            • I Just love this

              Per discussion with Kim Jong-Un, Asian countries are clearly America’s bitch, p/f/i.

          • brettonwilson

            you must have missed the part
            “US LISTED COMPANIES’

      • Mr. America

        Considering the false reality of China’s economy (e.g. ghost cities built to inflate GDP) I’d say China needs the US and the rest of the world a lot more then we need them. There’s always another country in line to mass produce the cheap shit we all consume. China is an export focused economy and if we stop buying all of our crap from China their economy will collapse.

        • AccountingNinja

          I’m fairly certain India is in line to take that role.

          • Account4This

            They (India) would be if they could get it together. Too much corrupt government/pieces to the government. The main problem in India is the effectiveness of laws in the various provinces (not sure if this is the correct term for Indian ‘states’), the varying degrees of corruption, and the extensive beauracracy that is in place creating an excessive number of ‘hoops’ to jump through.

    • Phil

      A few key points that are missing from the post above. First, the ban applies to audits of all registrants, not just Chinese companies listed in the U.S. So, if you are a U.S. company with significant operations in China, your U.S. audit firm may have a scope limitation as they cannot rely on the work of their Chinese affiliate. In terms of switching to another registered public accounting firm in China, the Big Four firms have invested a lot of money in their international networks to develop common audit platforms and to have English speakers facilitate the discussions between the Firms. These networks are extremely valuable and are the main reason the Big Four have cornered the market on the audits of large multi-national companies. So throwing the best tool available, the Big Four international network, out the window and trying to replace with local Chinese firms will not go well. Just look at the progress of the PCAOB inspections in China as an example. And now imagine explaining to your U.S. shareholders why the Company will need to be de-listed. The SEC has not won this battle as it has created a significant problem right in our backyard.

    • I Just love this

      America vs. China hegemony power struggle..and the Big 4 are caught in the middle, so messed up.

    • Oh boy

      The good news is you can’t have “audit failure” with a disclaimer of opinion!