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The SEC Folded Like a Cheap Lawn Chair in Its Settlement With Big 4 Chinese Affiliates

As you know, the much-awaited SEC settlement with Big 4 China affiliates hit the pages on Friday. This particular dust-up came about over some workpapers the SEC has waiting on since the Ming Dynasty or thereabouts.

Here's the TL;DR ICYMI:

The Securities and Exchange Commission today imposed sanctions against four China-based accounting firms that had refused to turn over documents related to investigations of potential fraud.  The China-based firms are members of large international networks associated with the “Big Four” accounting firms and registered with the Public Company Accounting Oversight Board (PCAOB).

Setting aside the $500,000 each firm will pay for withholding workpapers, this may have seemed like a victory for the SEC. But no, not so fast.

Per Jennifer Achilles and John Tan of Reed Smith, it's really nothing more than semantics:

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.

Timetric's The Accountant sat down with Professor Paul Gillis — co-director of the International MBA program at the Guanghua School of Management and trollthority on this matter — to get his thoughts on the settlement. We think you might find his thoughts interesting here:

The Accountant: You have maintained that a comprehensive deal between the US and Chinese regulators should precede any settlement agreement between the SEC and the Big Four. Are you surprised by the Friday announcement?

Paul Gillis: I think the SEC decided that a comprehensive deal with China was not possible, so they acted in this way to prevent the disruption to the capital markets that would have be the consequence of the Big Four getting banned.

TA: In your opinion, what should be the remit of such a deal between regulators?

Gillis: The SEC needs unfettered access to documents in China related to Chinese companies that list in the United States. Chinese companies should not be permitted to list in the United States unless they are able to be subject to all US laws.

TA: Have the US regulators been foolish, as you said, letting the Big Four and their clients off the hook before that regulatory deal is achieved?

Gillis: I think they have capitulated to Chinese regulators, creating the risk that investors will be hurt in the future.

In other words: this was the best they could get and it isn't much at all. Now you know. Which is more than we can say for the SEC.