Big Four settlement imminent? | China Accounting Blog | Paul Gillis

Big Four settlement imminent?

The Wall Street Journal, citing unnamed inside sources, reported that the SEC is close to reaching a deal with the China’s member firms of the Big Four over the lawsuit over audit working papers. The firms would be sanctioned, pay fines of $500,000 each, and have the suspension from practice that was ordered by an administrative trial judge removed. The Journal reports the SEC Commission could vote on the settlement as soon as February 5, 2015.

The article says that the settlement includes a strong framework for the firms to cooperate with the SEC and for the agency to obtain audit documents in the future. The problem is that the firms and the SEC have no ability to do that. China has refused to allow the firms to turn over working papers to the SEC or PCAOB, and any deal to do so has to be with Chinese regulators and not with the accounting firms.

I suspect that a deal is imminent between the US and China over audit and securities regulation. Given China’s recent proposal to clean up the VIE structure, I think China has decided it wants access to US capital markets and has decided to cooperate with US regulators and remove obstacles to US listings. Consequentially, I expect we will see a deal between Chinese regulators and the SEC and PCAOB before the settlement with the Big Four is finalized. US regulators would be foolish to let the Big Four off the hook before they get such a deal.

The penalty of $500,000 to each of the Big Four also makes no sense to me. If you accept the firm’s arguments that they were caught between a rock and a hard place when deciding whether to break either Chinese or US law, then no penalty would be appropriate. If you buy the judge’s argument that if the firms had found themselves in such a place because it was their own decisions (to accept clients when they knew that they might be breaking US law) that put them there, then the penalties need to be much larger. Penalties of $500,000 neither punish the firms nor deter bad behavior in such a lucrative market. On the other hand I believe the PCAOB shares some of the blame, since it should never have registered these firms to audit U.S. listed companies when the firms said they might not be able to comply with all aspects of US law.

Settlement of the regulatory problems and a fix to the VIE structure will go a long way towards removing some of thethree terrors associated with US listed Chinese companies. If only someone can find a way to stop accounting fraud.

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