On February 6, the Securities and Exchange Commission in Washington announced its order, ostensibly resolving its long-running impasse with the Chinese affiliates of the Big Four accounting networks, over working papers of the Chinese auditors demanded but not produced in response to the American agency’s investigation requests.
Is this “settlement” anything but another exercise in governmental hocus-pocus, by which the bureaucrats act as if they have delivered something real, and observers must pretend to believe them?
Reviews from the commentariat are mixed. The Corporate Counsel blog exuberantly exclaimed that the “Tug-of-War Over Audit Files Finally Ends!” By contrast, writing from over in China, Paul Gillis viewed it as the SEC’s “near complete capitulation to the Chinese.”
Let’s take a look.
First, the deal includes not a breath of reference to the perpetually frustrated aspirations of the Public Company Accounting Oversight Board to inspect the operations of China-based auditors. This hostage to fortune goes back to the launch of the PCAOB itself under the Sarbanes/Oxley law of 2002, when the PCAOB agreed to register non-US audit firms despite their explicit declarations of foreign legal impediments to compliance with its inspection regimes.
To the diminishment of the PCAOB’s modest stock of credibility, its much-vaunted “progress” against the entrenched resistance of the Chinese regulators to fall into line with its cross-border ambitions, as touted over the years by chairman James Doty and his colleagues, has proved continuingly elusive, with no real progress realistically in view.
As for the SEC itself, the devil lurking in the details of its deal with the Big Four is clutching his Satanic ribs with derisive and scarcely-suppressed hilarity. And well he might.
Under the agreement:
- The Big Four are to put up the trivial sum of $ 500,000 each – minor fractions and lost in the rounding errors of their fees and expenses to accomplish this four-year armistice.
- The firms concede, as they must, their refusal to comply directly with the SEC’s requests – under the arguable justification of the inhibitions of their local Chinese laws.
- But they are permitted not to admit – yes, also not to deny -- the SEC’s charges that they were law-breakers.
- Most important, they are unrestricted in any aspect of their on-going services to their Chinese clients, including those with presence in the American capital markets.
The SEC’s press release also plumps the “additional remedial measures” it might invoke in the event of future Big Four non-compliance with its further requests. But reference to the actual text of the Order (pages 21 et seq.) confirms these to be no more than the small-bore weapons the SEC has already deployed to such little effect.
The SEC may, that is, either commence new enforcement proceedings, a tool always at the ready in any event, or re-start the existing proceeding -- the final legitimacy of which is left untested by the Big Four’s pursuit of review or appeals, their rights to which are explicitly preserved (page 20).
Against which, having reached a local accommodation by giving their documents directly to the China Securities Regulatory Commission instead of to the SEC, the Big Four affiliates have inserted their home agency as a protective shield against future exposure in America.
That is, the Big Four undertake that for future SEC requests, either they will make actual production to the SEC – an unlikely prospect until and unless the recalcitrant CSRC changes its attitude -- or they will produce to the CSRC, while sending along separate logs of documents subject to claims of privilege or the constraints of Chinese rules regarding state secrets or information deemed sensitive for political or any other reasons.
The house-keeping burden of preparation and submission of these elaborate document listings, in fulfillment of the letter of the Big Four’s obligations – a cost-heavy hassle that will work primarily to the enrichment of the inevitable teams of lawyers involved – will plainly be done in Big Four dialog with the CSRC and in compliance with its views on the permissibility of onward production to the American agency.
As to the spirit, the CSRC retains unfettered authority over the ultimate release of the documents, not being a party to the Big Four’s agreement. So the SEC is left not one step further down the road to real cooperation and enforcement compliance than it was before this illusory “resolution.”
The claim by its staff in the SEC release that “the settlement is an important milestone in the SEC’s ability to obtain documents from China” would no doubt be agreed by both the Big Four and the Chinese regulators.
But they would each have their separate, distinct and antagonistic reasons, as this “milestone” sits on the berm of a pot-holed path to nowhere.
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