The US SEC dropped a bombshell last night, saying that it is beginning “administrative proceedings against the China affiliates of each of the ‘Big Four’ accounting firms” for failing to hand over audit papers related to suspected wrongdoings at nine Chinese companies that are listed in the United States. Although the identities of the nine China-based companies have not been revealed, this poses a risk to all US-traded Chinese stocks. Paul Gillis, a professor at Peking University’s management school, warns today:
I believe that this marks the beginning of the process to deregister Chinese accounting firms from the PCAOB and to ban them from practice before the SEC. Unless resolved, this will likely lead to the delisting of U.S. listed Chinese companies.
Since the SEC notice came out after the close of Monday’s trading, we’ll have to wait for the commencement of today’s trading in New York to see if investors are spooked. Then we’ll see if Chinese stocks in the US plummet, such as those of Baidu (NASDAQ:BIDU), Sina (NASDAQ:SINA), China Mobile (NYSE:CHL; HKG:0941), and very many more.
While the delisting of Chinese companies is only a theoretical possibility in this complex scenario, Professor Gillis, who’s co-director of the IMBA program at Peking University’s Guanghua School of Management, feels that some kind of regulatory change is set to happen:
There are situations where the China Big Four are playing a substantial role in the audit of US MNCs that have substantial operations in China. They may need to resolve this by dividing the work among several firms so that no single firm plays a substantial role.
I expect the next action we see is the PCAOB releasing a proposed rule that will revoke the registration of any accounting firm it cannot inspect. I expect that we see this in the next few weeks. The proposed PCAOB rule would be sent out for public comment, which should be vociferous. Any rule has to be approved by the SEC.
The ‘big four’ – and one other large U.S. accounting firm – embroiled in all this insist that they’re being held back from accessing some data by Chinese laws. The five involved are:
- BDO China Dahua Co. Ltd
- Deloitte Touche Tohmatsu Certified Public Accountants Ltd
- Ernst & Young Hua Ming LLP
- KPMG Huazhen (Special General Partnership)
- PricewaterhouseCoopers Zhong Tian CPAs Limited