(CN) - An SEC judge censured the Chinese units of the "big four" accounting firms, saying they "willfully refused" to produce the audit work papers of Chinese companies under investigation for accounting fraud.
In his scathing 112-page ruling, Cameron Elliot, an administrative law judge for the Securities and Exchange Commission, barred the Chinese partners of Ernst & Young, KPMG, Deloitte & Touche and PricewaterhouseCoopers from auditing any Chinese companies that list in the United States for six months.
He also censured a fifth firm, Dahua (formerly of the BDO international network), but did not suspend its operations.
The Chinese accounting firms claimed they did not act willfully, because their legal obligations under the Sarbanes-Oxley Act were "objectively unclear."
But Elliot found "nothing objectively unclear" about the U.S. securities law, and said the firms "knew exactly what was expected of them" when the SEC asked for the audit work papers.
"Thus, because respondents willfully violated a provision of the federal securities laws, they may be censured or denied the privilege of appearing or practicing before the commission," Elliot wrote.
He said their actions "involved the flouting of the commission's regulatory authority, which may not be as egregious as, say, accounting fraud, but is still egregious enough that it weighs against leniency."
Elliot also chided the firms for having "failed to recognize the wrongful nature of their conduct."
Each firm registered with the Public Company Accounting Oversight Board, Elliot said, so they knew that any failure to produce documents might violate Sarbanes-Oxley.
He suggested the firms took a "calculated risk," hoping their failure to cooperate wouldn't land them in hot water with the SEC.
"I have little sympathy for respondents on this issue" he wrote, referring to the firms. "Respondents operated large accounting businesses for years, knowing that if called upon to cooperate in a commission investigation into their business, they must necessarily fail to fully cooperate and might thereby violate the law. Then, when actually called upon to fully cooperate, Respondents complained that they should be relieved from that duty because, among other things, they invested money and effort in building up their accounting businesses. Such behavior does not demonstrate good faith, indeed, quite the opposite - it demonstrates gall."
Though the firms took a knowing gamble, they did not set out to defraud, Elliot found.
"[T]heir state of mind at the time of their respective violations was driven by their concerns over potentially draconian Chinese law," Elliot wrote, alluding to Chinese secrecy laws that the firms say forbid them from sharing the audit papers.
While the ruling is not expected to disrupt Chinese companies listed in the United States, it could be a "big deal" down the road if it stands, Jason Flemmons, a senior managing director at FTI Consulting, told The New York Times.
"I think the decision came totally unexpected to the firms," he told The Times.
The big four accounting firms issued a joint statement saying they planned to appeal the ruling if it gets approved by the SEC.
"In the meantime the firms can and will continue to serve all their clients without interruption," the statement said.
Judge Elliot operates independently of the SEC.