A series of accounting scandals at Chinese companies has battered share prices in the United States, costing investors several billion dollars.
The SEC wants to see "work papers," or corporate documents used by auditors to prepare financial reports for nine Chinese companies suspected of fraud. Its complaint said Chinese affiliates of the "Big Four" accounting firms — Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers — and a fifth firm, BDO, failed to comply with orders to hand over the documents.
The accountants say Chinese national secrets laws bar the release of documents, but the SEC said firms "face serious consequences" if they conduct audits knowing they cannot comply with U.S. disclosure requirements.
The SEC complained that it had sent its Chinese counterpart, the China Securities Regulatory Commission, 21 requests for assistance in 16 investigations since 2009 and failed to receive any audit papers. It said negotiations aimed at establishing a framework for sharing information have made no progress.
Separately, the accounting oversight panel created by a 2002 anti-fraud law, says it is required to conduct regular inspections of Chinese auditors of companies with U.S.-traded stocks. Chinese authorities have resisted that.
Pressure from American regulators could accelerate a trend among some Chinese companies to buy back their U.S. shares and move to China's domestic exchanges or go private.
U.S.-traded Chinese companies saw share prices plunge following the 2008 global crisis, while economic growth at home, even after a recent decline, is still forecast at about 8 percent this year. Rising Chinese incomes are creating a bigger pool of money for investment.
In the biggest delisting this year, Focus Media Holding Co. said in August its chairman and private equity firms would buy back its U.S. shares in a deal that valued the Shanghai-based advertising company at $3.5 billion. Company managers complained its U.S. share price was too low and failed to reflect the strength of its business.
Smaller companies also are pulling out of the United States, helped by financing from Chinese institutions that are flush with cash from the country's economic boom. A business magazine said the government's China Development Bank has lent $1 billion to companies this year to buy back U.S. shares and move their listings to domestic exchanges.
Beijing has made it easier for private companies to join China's two exchanges in Shanghai and the southern city of Shenzhen, though most listings still are for state enterprises. The Shenzhen exchange created a second board for small companies, imitating the U.S.-based Nasdaq market.
If Chinese companies leave American financial markets, "the only one that gets hurt is the U.S. exchanges that lose some business but gain credibility for having high standards," said Peking University's Gillis.
"And the accountants get rich, because if they move to Hong Kong, they have to be audited again," he said. "So perversely, the accountants are probably the biggest winners if this thing blows up."