China Warns U.S. of Consequences from Barring Auditors

China warned the U.S. of “consequences” after the Securities & Exchange Commission barred the four largest accounting firms from conducting audits of U.S.-listed Chinese companies.

The decision to ban the Chinese affiliates of the accounting firms for six months “ignored” China’s efforts and progress made on cross-border regulatory cooperation, the China Securities Regulatory Commission said. Chinese stocks traded in New York fell to a two-month low yesterday as the ruling sparked concern that the companies won’t be able to put together their 2013 earnings reports in time to meet U.S. listing requirements.

“We hope the SEC will take into consideration the big picture of China-U.S. regulatory cooperation, make the right judgement to resolve the situation properly,” the CSRC, the nation’s securities body, said on its microblog. “The SEC should bear all responsibility to possible consequences arising from the decision.”

The ruling was made after the accounting firms’ units in China failed to comply with SEC orders for documents needed for a series of accounting fraud probes. The firms receiving six-month bans are Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. The ruling, if finalized, could impact the 425 Chinese companies with market capitalization of $185 billion traded in New York.

Limited Impact

The sanctioned firms said in an e-mailed statement that they will appeal the decision.

Qihoo 360 Technology Co., which uses Deloitte as its auditor, said the impact will be limited. Qihoo has scheduled its earnings date for around the end of February to early March. The company will announce a final date about 10 days ahead. Its American depositary receipts plunged 3 percent in New York trading yesterday.

“The ruling will take months to be finalized and if the auditing firms appeal it could take years,” Wu Jing, a director of investor relations for Qihoo, said by phone today. “We are closely monitoring the situation.”

The SEC ruling will not affect 2013 annual reporting of U.S.-listed Chinese stocks because the accounting firms may appeal and the ruling may take a long time to implement, China International Capital Corp. analysts Haofei Chen and Wanting Yu wrote in a report dated today.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. dropped 3.5 percent to 100.48 yesterday. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., tumbled 4.5 percent to $35.02, the largest retreat since November 2011.

Internet Disruptions

Stock declines triggered by the SEC ruling may be a good time to buy, especially Internet shares such as Qihoo, Tencent Holdings Ltd., and Inc., the CICC analysts wrote. Tencent dropped 4 percent to HK$501 at the close in Hong Kong. The shares plunged 3.5 percent in New York yesterday., which also uses PwC as its auditor, will adhere to its scheduled date for fourth-quarter earnings announcements, which it hasn’t disclosed yet, company spokeswoman Jiang Xin, said by e-mail. Liu Qi, a spokesman for Sina Corp., didn’t respond to an e-mail and two phone calls.

More than two-thirds of web traffic in China, which has more than 618 million Internet users, was disrupted on Jan. 21, according to the online security provider Qihoo. Affected sites included those of Alibaba Group and Baidu Inc., China’s largest web search engine. China said hackers may have been to blame.

E-Commerce China Dangdang Inc., China’s biggest web book retailer, sank 11 percent while SouFun Holdings Ltd., a real-estate information website, posted the biggest drop since October. Baidu fell the most in nine months.

Baidu Response

Dangdang’s ADRs fell to $9.89 in the biggest drop since Oct. 22. The slump cut Beijing-based Dangdang’s gain to 3.6 percent this year, compared with a 130 percent surge in 2013. Baidu’s ADRs slid 6.2 percent to $163.58, a two-month low. SouFun’s ADRs sank 7.7 percent to $87.47. YY Inc., owner of an entertainment website, retreated 7.4 percent to $63.77, falling the most since Nov. 6.

The accounting firms have 21 days to file a so-called petition for review with the SEC before the decision by U.S. Administrative Law Judge Cameron Elliot would become final and go into effect. If the five-member commission were to uphold the judge’s decision, the firms could then take it to the U.S. Court of Appeals in Washington.

Five calls to Dangdang’s marketing office went unanswered today. Kaiser Kuo, a spokesman for Baidu, said by phone today the company’s earnings date hasn’t been set yet and the ruling by the SEC won’t affect its earnings release.

‘Law Violations’

The SEC enforcement division was “gratified” by the decision, chief litigation counsel Matthew Solomon said in an e-mailed statement. “These records are critical to our ability to investigate potential securities law violations and protect investors.”

NQ Mobile Inc., a Chinese mobile-security service provider, was accused by Muddy Waters LLC of inflating sales in a October report. Beijing-based NQ Mobile has denied the allegations and set up an independent committee to review Muddy Waters’s report.

Carson Block, founder of Muddy Waters, sent a letter to NQ Mobile auditor PricewaterhouseCoopers urging the accounting firm to take a closer look at NQ’s accounting books, according to a Twitter posting of the short-selling firm on Jan. 22. In 2011, Block accused Sino-Forest Corp., a Chinese plantation company listed in Canada, of fraud, leading it to file for bankruptcy protection.

Early Ruling

Ernst & Young didn’t conduct audits of Sino-Forest in accordance with accounting industry standards, the Ontario Securities Commission said in a statement of allegations issued in December 2012, and the accounting firm agreed to pay C$117 million ($118 million) to settle claims in a Canadian class action suit in the largest settlement by an auditor in Canadian history.

“This is a preliminary ruling,” Kim Titus, senior director of corporate communication at NQ Mobile, said by phone from Dallas. “All the reports are going to be out as scheduled. All the work with PricewaterhouseCoopers will continue as it has.”

The worst possible time for the suspension would be in the next month or two, as companies need to file an annual report with an audit opinion on Form 20-F, which is due on April 30, Paul Gillis, a professor of accounting at China’s Peking University, said in a post in his China Accounting blog.

“If the firms are suspended, they cannot issue audit reports, so the clients cannot file Form 20-F,” he wrote. “Under exchange rules, this should lead to the companies being suspended from trading since investors do not have the data they need to be able to trade.”

Ctrip Discussions International Ltd., the biggest online travel agency in China, and NetEase Inc., a web game operator, are scheduled to report their 2013 full-year results on Feb. 12, according to their statements this week. uses PwC as its auditor.

“The company is actively discussing the issue with regulators,” Wei Yu, director of investor relations at Ctrip in Shanghai, said by phone. “The company will not be affected in the short term as the ruling isn’t finalized.”

— With assistance by Belinda Cao

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