The world´s four largest auditing firms are up in arms, as their China division as the SEC rules against them. But the real victims are their Chinese clients, warns Peking University professor Paul Gillis on his accouting weblog. Not only listed firms, but all companies working with the big four.
As much as the firms are feeling sorry for themselves, it is their clients and the investors in those clients who will be hurt if the firms are banned from practice. A ban could lead to the companies being kicked off of U.S. stock exchanges for failing to produce audited financial statements. IPOs would have to be post-poned until the bans were over. Financings would be delayed. Fortunately appeals are likely to delay this for a long time.
The effect would not be limited to U.S. listed Chinese companies. A ban from practice before the SEC would not allow the China member firms of the Big Four to do any audit work that is used in connection with a report filed with the SEC. That would preclude the China Big Four from working with their U.S. counter-parts on big U.S. MNCs like General Motors and IBM during the ban. That would increase the risk on MNCs with China operations which is not in anyone’s best interest.
The SEC tried to head this off. They asked the judge for a lifetime ban on the firms, but wanted it limited to engagements where the China firm does more than 50% of the audit. That idea was obviously designed to make sure the ban did not prevent the firms from working on MNCs. The judge disagreed, putting in place a six-month ban but making it a complete ban on the right to practice. That means the firms cannot work a single hour on MNC clients during the ban.
That is a bad result, not just for the firms, but also for the capital markets. I hope the SEC commissioners change that when they review the decision. The judge said he could not find a legal justification for a partial ban; I hope the SEC commissioners are more creative.
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