The SEC has released some procedural filings related to the Big Four’s appeal of the administrative trial judge decision that banned the Big Four from SEC work for six months. Briefs will not be completed until September, making it near certain that the decision on the appeal will not come within the seven months that SEC guidelines suggest. If the firms lose the appeal, which I expect they will, the decision could happen at the worst possible time – near the end of the calendar year. That would be right at the beginning of audit season for calendar year companies. Unless the Big Four are successful at getting a Circuit Court of Appeals judge to stay the decision, U.S. listed companies on a calendar year will all miss their required annual filings in April 2015.
The best outcome at this point is a negotiated diplomatic solution. The most likely time for such an agreement is the annual Strategic and Economic Dialogue between the U.S. and China that will be led on the U.S. side by Jack Lew and John Kerry. That meeting is expected to be in July in Beijing, but details have not been released.
Relationships between the U.S. and China have been cooling, partly because of issues related to China’s neighbors. But the U.S. action to charge five Chinese soldiers with hacking into U.S. computers this week is certainly not going to warm things up. But perhaps both sides will be looking for an issue to cooperate on, and maybe that will be accounting regulation.
But how much room does the United States have to negotiate? China wants the U.S. to accept a concept known as regulatory equivalence. China has that deal on accounting regulation with the European Union. If a Chinese regulator like the MOF or CSRC regulates a Chinese accounting firm, EU accounting regulators are to accept that work as if it were their own work. U.S. laws generally do not provide for U.S. regulators outsourcing their responsibilities to foreign regulators. Amendments to Sarbanes Oxley allow greater exchange of information with foreign regulators, but do not go so far as to allow U.S. regulators to outsource their responsibilities to foreign governments. Conservatives who already panic when a American judge reads a foreign legal opinion for ideas to solving a U.S. case are unlikely to agree to change the rules to accommodate regulatory equivalency. There is also the question of focus and expertise. Would a Chinese regulator have the skills to determine whether accounts were prepared under U.S. GAAP and audited under PCAOB auditing standards? Would they even have any interest in looking into U.S. listed Chinese companies? History indicates they will not. No Chinese company or executive has been charged with a Chinese crime related to the many heists that have taken place in U.S. listed Chinese companies, even when Chinese laws have clearly been broken.
I am becoming increasingly pessimistic about a positive outcome.