The China-based networks of the Big 4 firms have appealed to the Securities and Exchange Commission an administrative law judge's initial decision that the firms should be suspended from practice before the SEC for six months for failing to produce demanded audit documents.

The joint petition asking the SEC to review and overturn the decision of ALJ Cameron Elliott says the judge erred in applying the Sarbanes-Oxley Act to the circumstances and ignored recent cooperation on the part of Chinese officials to break the stalemate over the documents in question. The petition says before Elliott published his decision, the China Securities Regulatory Commission provided the SEC with all of the work papers requested of Deloitte Touche Tohmatsu and some of the work papers requested of Ernst & Young Hua Ming.

Soon after the ALJ published his decision, the SEC dropped its action against Deloitte Touche Tohmatsu demanding work papers in connection with the investigation of accounting problems at Longtop Financial Technologies. The firms also say in their joint petition that additional audit work papers for clients of KPMG Huazhen and PricewaterhouseCoopers Zhong Tian “have all been produced to the CSRC and are in the process of being made available” to the SEC and the Public Company Accounting Oversight Board.

The SEC began administrative proceedings against the Big 4 affiliate, as well as BDO China Dahua, in December 2012 to pursue evidence in connection with several instances of alleged accounting fraud at China-based companies. Dahua is included in the ALJ's call for suspension, although the firm is no longer part of the BDO network.

The firms refused to comply with SEC demands for audit work papers, saying it would violate the law in China and subject them to harsh penalties, including imprisonment. The ALJ said the SEC should suspend all five firms for six months, meaning they could not perform audit work on any U.S.-listed entity. That would leave an estimated 200 China-based entities scrambling to find a new audit firm, though still not resolving the question of regulatory access to China-based entities that do business in U.S. capital markets.

“It is difficult to overstate the importance of the consequences that would flow from the sanctions imposed by the initial decisions,” the five firms wrote in their appeal. They perform the vast majority of audit work for China-based, U.S.-listed companies, and assist with audits of “hundreds of other issuers, including many prominent U.S. multinationals with operations in China.” The recommendation for a full bar on the firms is premised on significant legal and factual errors, the firms said. “It also relied on the erroneous policy judgment that the benefits of sanctions outweighed their negative consequences.”

If the SEC upholds the ALJ recommendation, the firms can appeal further to the U.S. District Court.