What’s behind the SEC action against China affiliates of the Big Five?

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The U.S. Securities and Exchange Commission took actions against the China affiliates of each of the big four and another accounting firms, for not turning over audit papers relating to an investigation against a few Chinese firms for possible accounting fraud against American investors. This marks the breakdown of months of talks and negotiations between the SEC and the China affiliates of these accounting firms.

Photo Credit: Reuters

Photo Credit: Reuters

Various articles have reported that if the negotiations continue to break down, the worst case scenario could be that these accounting firms lose their license, which would lead to Chinese firms that work with these accounting companies be swept out from the U.S. trading floor. American companies who have big presence in China would face extreme difficulties looking to accounts and thus their business will take a blow.

Of course, this is the case that no one wanted, but just as the looming U.S. fiscal cliff, although no one wanted it, it could happen after all. This represents the latest attempt of both China and the U.S. figuring out how to conduct business in a both cooperative and competing way. The two countries, being the largest and the second largest economies in the world, are head to head trying to get as much revenues as possible, so picking at each others’s companies and giving each other hard time sometimes would help one standing out in the game. On the other hand, same old reality is that multinational commerce is so intertwined that any action like this could result in countless butterfly effects, and often times one would end up hurting itself as well.

This SEC’s most recent action can serve as testing the water of what kind of regulations would be in place for Chinese branches of U.S. firms, especially accounting firms, which has double layer of financial complication. China doesnt look at backing down anytime soon, and of course, it is also more political than what it is claimed. Just how much national secret could be in those audit papers and how important the information could be given the price is many Chinese companies leaving the U.S. trading floor would be of serious consideration for China when continuing the negotiation.

I would highly suggest the China affiliates of the big five take a conceding position coming out of another talk. Maintaining a U.S. listing would help these Chinese firms on the front of prestige, access to capital and investors and and share liquidity. Although China does have a leverage that a negative outcome would hurt many U.S. firms too, these Chinese firms are in a much vulnerable position than those well-established U.S. companies to take a hit.

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