The US Security and Exchange Commission (SEC) has again granted an extension order to the court hearings on the six months ban prohibiting Big Four Chinese firms to provide services to US listed Chinese companies.
This is the third extension order issued by the SEC in this matter since January 2014 when a SEC Judge ruled that all of the Big Four Chinese joint ventures as well as BDO former Chinese firm, DaHua, had violated the Sarbanes-Oxley Act, and that they should be banned from working for any US-listed Chinese companies for the next six months.
The Big Four Chinese firms and the SEC Division of Enforcement have been negotiating a settlement since the ruling and the SEC repeated extension orders suggest that progress is being made.
However, parallel to this negotiation, US Public Company Accounting Oversight Board (PCAOB) negotiations for regulatory access to China have been ongoing for a decade.
According to Peking University’s Guanghua School of Management professor Paul Gillis this could be a regulatory impasse.
In his latest blog Gillis wrote that the issue remained straightforward. "The PCAOB wants to do joint inspections side by side with Chinese regulators, while China wants the PCAOB to accept their work. The SEC wants unfettered access to documents related to US listed Chinese companies while China wants to prevent disclosure of information that could be harmful to China’s interests," he wrote.
"The positions of all parties are reasonable, and there is little scope for anyone to compromise."
In July, PCAOB chairman James Doty told The Accountant the US regulator was hopeful for an imminent agreement.
"We had very important and productive meetings with both China’s Securities Regulatory Commission and the Ministry of Finance," he said. "I also believe the PCAOB was able to reach a joint commitment with both of those regulatory agencies to move forward with a cooperation that would enable us to conduct the first inspection of a PCAOB-registered mainland Chinese audit firm before the end of the year."
With the end of the year fast approaching seems the regulatory impasse described by Gillis is still very much a reality. However Gillis believes Chinese and US regulators will ultimately reach an agreement, but that it might not be to the US advantage.
"I believe that Chinese regulators will have the upper hand in these negotiations. Knowing that U.S. regulators are unlikely to delist Chinese stocks, they will seek a deal that gives up no meaningful turf while allowing US regulators to save face," he wrote. "Since the PCAOB and SEC appear to be negotiating separately, Chinese regulators are likely to play them off each other."
Big Four China firms in settlement talks with SEC
Countdown to PCAOB’s inspections of Chinese audit firms