U.S. and Chinese regulators will have to come to a compromise on their conflict over auditor oversight to prevent Chinese companies trading in the U.S. from being delisted, according to law firm Paul Hastings LLP.
The Securities & Exchange Commission accused units of the Big Four accounting firms of not cooperating with an investigation into fraud by China-based companies in a Dec. 3 administrative order. The U.S. and China disagree over whether auditors can share financial documents with regulators, and the firms -- which include Ernst & Young Hua Ming LLP and KPMG Huazhen -- say Chinese law prevents them from complying with the SEC’s demands.
Should the auditors be barred from reviewing the financial statements of Chinese stocks listed in the U.S. the companies would have to withdraw from the market, Steven Winegar, a Hong Kong-based partner at Paul Hastings, which has represented companies including Nasdaq-listed Jiayuan.com International Ltd., said on a conference call hosted by Jefferies Group Inc. today.
“That of course has a catastrophic effect on the market value and on the companies themselves.” he said on the call with investors. “It’s almost unthinkable that it will get to that stage.”
The key issue in this case is whether U.S. or Chinese regulators should have primary supervising responsibility for the accused auditing firms, according to Winegar. The SEC order “gives a fair amount of time for continuing negotiations and continuing settlements” between the Chinese and U.S. authorities, while “there’s no assurance this will be resolved any time soon.” he said.
The auditors mentioned in the SEC document have 20 days to respond to the allegations and the administrative law judge will issue an initial decision within 300 days, according to the order.
The Bloomberg Chinese Reverse Mergers Index, which tracks a basket of companies that gained U.S. listings after buying firms that already trade, has lost 61 percent over the past two years, while the Bloomberg China-US Equity Index of the most-traded Chinese shares in the U.S. declined 19 percent.