This is probably the biggest week in the 30-year history of the Big Four in China.
Today, the hearings before the administrative trial judge of the SEC commenced at 10 am in an auditorium at the SEC headquarters in Washington. At stake is the right of the China affiliates of the Big Four and BDO to audit U.S. listed companies, and more importantly, the ability of U.S. listed Chinese companies to keep their listing.
On Wednesday, the U.S. and China will begin their annual Strategic and Economic Dialogue (SED). I expect that resolution of the standoff between U.S. and Chinese regulators over audit working papers will be on the agenda and I am hopeful that a diplomatic breakthrough will be reached.
The accounting firms and U.S. listed Chinese companies should hope that I am right. I do not think the SEC case will go well for the accounting firms. The final round of pre-trial sparring ended in a ruling requiring the firms to disclose their fees from auditing U.S. listed companies. The firms resisted providing this data, but the judge noted …”it would be helpful to know if a permanent bar on practicing before the Commission for any purpose, even in connection with performing audit work for non-China-based U.S. issuers, would essentially put a Respondent out of business entirely.” I know the answer to that question. No, it would not put the firms out of business entirely, but it will hurt really badly.
I remain hopeful that one of the few deliverables from the SED will be an agreement on turning over audit working papers and for joint PCAOB/CSRC inspections of auditors. That should resolve the SEC case before it comes to a decision.
Deliverables from the SED have often been platitudes. I expect that will continue to be the case on important issues like investment, cyber spying, and currency manipulation (The Paulson Institute is making a good case for a bilateral investment treaty). One of the concrete deliverables in last year’s SED was to build a Chinese garden at the National Arboretum. If they can’t reach agreement on audit working papers I hope the parties can at least agree to stock the garden’s ponds with goldfish.