The SEC has announced a settlement with the Chinese member firms of the Big Four over their failure to give the SEC auditing working papers when requested to do so. The firms argued that they were unable to do so because of Chinese laws, but after the suit was filed the firms worked with Chinese regulators to release the working papers. An administrative trial judge banned the firms from practice for six months, and the settlement is a result of the firm’s appeal of the judge’s decision.

　　The settlement falls far short of what is needed to protect investors. What is needed is a comprehensive deal between China and the US to allow the SEC unfettered access to documents necessary to enforce US securities laws on Chinese companies that have elected to list in the United States. Instead the settlement lets the accounting firms and their clients off the hook, providing only a mechanism to restart the proceedings if the firms fail to cooperate in the future.

　　It appears that the SEC decided to kick the can down the road, rather than use the leverage of these cases to push China into greater cooperation on securities fraud by US listed Chinese companies. There have been many instances of fraud committed by US listed Chinese companies, and most perpetrators have escaped justice when China blocked the SEC from getting China documents. As far as I know, no Chinese person has faced prosecution in China for crimes associated with US listed companies, even when the purported acts – theft, kidnapping of auditors, fake bank confirmations, etc. are all crimes in China.

　　China has won in these negotiations. It has argued that cooperation with the SEC to enforce US securities laws against Chinese people on Chinese soil would infringe on China’s national security. The counter argument is that the companies voluntarily submitted themselves to US regulation when they chose to list in the US. China wants it both ways – it wants access to US markets but does not want to comply with the related US laws.

　　Also missing from the settlement is the ability of the PCAOB to inspect Chinese accounting firms. That dispute has been ongoing for a decade, and this deal takes the pressure off Chinese regulators to find a way for the inspections to work.

　　I expect China will be more discerning of when it will withhold cooperation with the SEC and PCAOB. When it does not matter to China, documents will flow much quicker in the future. But when it does matter, say a problem with a large state-owned enterprise or a politically connected individual, we will be back to where we started, and investors will be screwed.