Washington (AFP) – A U.S. judge has ordered Chinese units of the “Big Four” global accounting firms to be suspended from auditing U.S.-traded companies for six months, saying they “willfully violated” U.S. laws.

The 112-page ruling by U.S. Securities and Exchange Commission (SEC) administrative law judge Cameron Elliot could temporarily leave more than 100 Chinese companies quoted on U.S. markets without an auditor and unable to trade.

The auditors and a fifth China-based accounting firm fell foul of the law by refusing to turn over documents about some of their clients to the commission, which wanted help in a fraud probe, Elliot ruled.

The ruling does not take effect immediately and the companies plan to launch an appeal with the SEC.

“The firms note that the decision is neither final nor legally effective unless and until reviewed and approved by the full U.S. SEC Commission. The firms intend to appeal and thereby initiate that review without delay,” they said in a joint statement.

China’s stock market regulator, the China Securities Regulatory Commission, expressed “profound regret” over the SEC decision Friday.

“This ruling does not take into account Chinese efforts to hand over audit documents,” spokesman Deng Ge told reporters.

If the ruling stands, not only will the Chinese companies be left with no auditor but it could also hamper the audits of U.S. multinationals with significant operations in China.

This is because the Chinese affiliates of the Big Four — Pricewaterhouse Coopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young — often help their U.S. sister firms complete those audits.

Without audited financial statements, a company cannot sell securities in the United States or remain listed on the country’s exchanges.

“This is a body blow to the Big Four,” said Paul Gillis, a Beijing-based professor at Peking University’s Guanghua School of Management. “It’s really quite a harsh ruling,” he told Dow Jones Newswires.

The SEC hailed the ruling, saying it upheld the commission’s authority to obtain records that are “critical to our ability to investigate potential securities law violations and protect investors”.

The fifth firm, Dahua CPA, was censured by Elliot but not suspended. Dahua was an affiliate of another large accounting firm, BDO, until last year although they are no longer linked.

The SEC had sought audit work papers from the firms to assist its investigations of more than 130 Chinese companies trading on U.S. markets that have been subject to accounting and disclosure questions in the past few years.

Many of those companies have their independent audits performed by the Chinese affiliates of the Big Four.

The SEC had wanted to know more about what the auditors had found about the companies.

But the Chinese firms refused to turn over the documents, saying Chinese law treats the information in such documents as “state secrets”.

AFP Photo/Paul J. Richards