In the first blow to land in the long running dispute between U.S. regulators and the accounting firms that certify the financial statements of China-based companies listed on U.S. exchanges, yesterday an Administrative Law Judge at the Securities and Exchange Commission (“SEC”) issued a decision barring the Chinese affiliates of the “Big Four” accounting firms from appearing before the SEC for a period of six months and censuring the Chinese affiliate of BDO.  This means, quite simply, that the “Big Four’s” Chinese affiliates cannot provide audit services for any U.S.-listed companies during this period, and the affected companies will have to scramble to find new outside auditors.

The ALJ’s decision can be appealed to the full Commission for de novo review.  From there, the respondents can appeal to the D.C. Circuit.  The firms indicated they will appeal.

As we wrote earlier here, the SEC instituted administrative proceedings in December 2012 against these accounting firms for their “willful refusal” to provide audit work papers and other materials to U.S. regulators on demand, as required under Sarbanes-Oxley.  The accounting firms had argued that complying with this requirement would violate China’s state secrets and archives laws, and subject the firms to civil and/or criminal penalties.  These arguments were found to be insufficient to excuse a refusal to comply with U.S. law.

We will continue to follow the developments in this area.  The ultimate outcome of this dispute may be wide scale delisting of China-based companies from U.S. exchanges.