The Securities and Exchange Commission has slapped a six-month ban on the affiliates in China of all four Big 4 firms from practicing before the commission, meaning their approximately 200 clients in China risk losing their U.S. listings because they won't be able to file audited financial statements.

“They threw the book at them,” says Paul Gillis, a professor at Peking University and an expert on US-Chinese accounting issues. “We thought it would be a slap on the wrist, but they really threw the book at them. This is going to be incredibly disruptive for capital markets and for U.S.-listed Chinese companies.”

In a drawn-out quest for audit work papers to investigate accounting irregularities at nearly a dozen China-based, U.S.-listed entities. the SEC's options are limited as firms have refused to hand over documents citing Chinese privacy law. The six-month ban issued by an SEC administrative law judge on appearing before the SEC means clients of Ernst & Young Hua Ming, KPMG Huazhen, Deloitte Touche Tohmatsu, and PricewaterhouseCooper Zhong Tian will need a new auditor before they can file their next periodic reports. The SEC also censured Dahua CPA Co. Ltd., formerly affiliated with BDO International.

“The practical effect of this could be to ban Chinese companies from accessing U.S. capital markets,” says Gillis. “In effect, kicking Chinese companies out of U.S. exchanges for some period of time.” The appeals process, however, is likely to stall the ban and give U.S. and Chinese officials more time to try to arrive at a different solution, says Gillis.

The five-member commission has 21 days to act on the administrative law judge's order, which means a decision could coincide closely with when calendar-year foreign private issuers are required to file their financial statements, he says. The firms have said they will appeal to U.S. District Court if the SEC proceeds with the ban.

The Big 4 firms issued a joint statement responding to the SEC decision lamenting sanctions against firms that were barred by Chinese law from answering U.S. demands. "However, the firms note that the decision is neither final nor legally effective unless and until reviewed and approved by the full US SEC Commission," they wrote. "The firms intend to appeal and thereby initiate that review without delay. In the meantime the firms can and will continue to serve all their clients without interruption. The firms are heartened by the significant progress on information sharing between the Chinese and U.S. regulators over the past year, which the firms have worked hard to support."

Former Commissioner Paul Atkins testified in the proceedings and told Elliot the SEC should “do whatever it takes to get the information,” including escalating the issue to the U.S. Treasury Department or President Obama. “He did not think the commission would be able to get the materials any sooner through this administrative proceeding than by some other means,” Elliot wrote in his initial decision.

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