In an Order of Settlement released February 6, 2015, the SEC agreed to stay the administrative action against the Chinese affiliates of the “Big Four” accounting firms for refusing to turn over their audit work papers relating to several U.S.-listed Chinese companies. As we wrote earlier here, the Chinese affiliates of the audit firms had been facing a six-month bar from appearing before the SEC, which would have disrupted their business and the business of countless U.S.-listed Chinese companies. The Order acknowledges that the requested documents have been provided, and allows the audit firms to continue representing U.S.-listed companies. The Order also requires each firm to pay a $500,000 fine and agree to abide by certain procedures regarding the SEC’s document requests for the next four years. If the audit firms follow the procedures set forth in the Order, the administrative action will be dismissed after a four-year period.

Throughout the administrative proceeding, the Chinese affiliates of the “Big Four” argued that they were caught between a rock and a hard place. If they produced audit work papers directly to the SEC, they could be subject to civil and/or criminal action in China for divulging state secrets. And if they did not produce the requested documents, they could be barred from appearing before the SEC and effectively lose their ability to audit U.S.-listed Chinese companies. The terms of the settlement now require the audit firms to respond to the SEC’s future document requests within 90 days. However, the firms will produce documents to the China Securities Regulatory Commission (CSRC), not the SEC. Both the firms and the CSRC will then be permitted to make redactions to the documents before providing them to the SEC. Additionally, the audit firms may refuse production altogether if they determine, along with the CSRC, that the requested documents should be withheld under China’s state secrets regulations.

This settlement appears to send the SEC right back where it started: unable to review the work papers of Chinese audit firms without the consent of Chinese regulators. The settlement also appears to be a complete win for the audit firms. They are no longer required to produce documents directly to the SEC and risk violating China’s state secrets laws, and they no longer have to fear being barred from appearing before the SEC – at least not for the next four years.