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Baidu (Core Stock) Baidu (Nasdaq: BIDU) and other Chinese stocks have been buffeted by what promises to become a tense battle between U.S. regulators and the Chinese government. The SEC announced Monday that it is beginning administrative proceedings against the Chinese affiliates of the five largest accounting firms -- Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers, and BDO International -- seeking to force them to turn over documents as required by U.S. securities law for various companies under audit.
This puts the firms between a rock and a hard place. As we've noted before, the U.S. requires these companies to turn over certain documents ... and the Chinese government forbids it. Until now, the U.S. has essentially turned a blind eye to the issue, but a mounting number of fraud cases under investigation have pushed the SEC to act.
What does this mean for Baidu and the other Chinese companies on our scorecard? The fact that these companies use well-known western accounting firms that refuse to turn over documents doesn't necessarily mean anything is amiss -- the firms are merely following Chinese law, after all. On the other hand, it certainly muddies the water for U.S. investors. There have been a number of alleged frauds that appear to have been rubber-stamped by auditors and accountants with trusted names. Ernst & Young, for instance, agreed to pay a $118 million fine to Canadian regulators to settle shareholder allegations that it misled investors in bankrupt Sino-Forest (it hasn't admitted wrongdoing, of course).
Where this will go is hard to say. The SEC could back down, either on its own or under pressure from the Obama administration, or a diplomatic solution between the U.S. and China may be reached. But if the SEC moves forward into the current morass, the result may be that Chinese firms no longer use U.S.-based auditors -- or even that Chinese companies are forced to delist from U.S. exchanges. We'll keep following the story.
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