BEIJING, Feb. 19 -- Chinese subsidiaries of the world's largest accounting networks proved too big to ban in their spat with the U.S. Securities and Exchange Commission.

Chinese branches of PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young had refused to turn over documents related to what the SEC said were investigations of potential fraud. Only a comprehensive arrangement between the two country's regulators can stop it happening again.

Despite their Chinese clients' securities being traded in the U.S., the accounting firms maintained that Chinese law prohibited them from passing the documents in question to the SEC.

In January 2014, a judge found that the accounting firms willfully violated the Sarbanes-Oxley Act which requires foreign public accounting firms to provide such documentation to the SEC upon request.

In a scathing ruling, the judge called for a half-year suspension of the accounting firms' auditing of Chinese companies listed in the U.S.. The suspension went on hold as the firms appealed the the ruling.

BIG FOUR "WINS"

The SEC will "impose sanctions" against the firms. As part of the settlement, SEC censured the firms, which eventually began providing the documents, and required them to perform specific steps to satisfy SEC requests over the next four years.

The firms each agreed to pay 500,000 US dollars and admitted that they did not produce documents before proceedings were instituted against them in 2012, but without admitting or denying the SEC contention that they violated securities law. The sanctions are largely seen just a slap on the wrist.

"As compared to the fines that the SEC typically imposes, the amount is small, almost a nuisance payment." said Jacob S. Frenkel, an expert on SEC investigations who worked for almost ten years at its enforcement division and as a U.S. federal criminal prosecutor.

"The true concern for the accounting firms was a ban on their ability to conduct audits. Such a punishment would have had a significant negative effect on their business," said Frenkel, now a lawyer at Schulman Rogers.

"The settlement lets the accounting firms and their clients off the hook," said Paul Gillis, a professor at Guanghua Management School of Peking University and previously a partner with PricewaterhouseCoopers.

In a joint statement, the Big Four said they were pleased to have reached a settlement, by which "the firms' ability to continue to serve all their respective clients is not affected."

"The real winner here is the four accounting firms, because they can continue performing the audits uninterrupted." said Frenkel.

TOO BIG TO BAN?

There was widespread interest in what would happen if the Big Four were banned, as their clients - hundreds of Chinese companies with huge market capitalizations - would be thrown into disarray.

"I think the SEC determined that if it went ahead and banned them, the result would be that Chinese companies would be kicked off U.S. stock exchanges, and that was a step too far." said Gillis.

"The SEC cannot say this, but it would much prefer to have audits conducted by the Chinese subsidiaries of the major accounting firms than by smaller local or regional firms," according to Frenkel.

Despite their reluctance to turn over documents in this case, the Big Four are widely believed to conduct audits of the highest quality.

"If the SEC had issued a ruling that would have prevented these firms from conducting audits, then the SEC's concerns about audits would not go away, the SEC's job would be more difficult and the SEC would be concerned about less reliable audit work."

EYEING THE FUTURE

The China Securities Regulatory Commission (CSRC) has welcomed the settlement, saying that it has significant consensus with the SEC in cross border enforcement cooperation. The SEC said it received much welcome assistance from the CSRC.

"The settlement provides a path forward for obtaining productions and enhanced future cooperation from the Big Four firms," said its associate director of the Enforcement Division, according to the statement, but few were convinced.

China has won in these negotiations, observed Gillis.

China has argued that enforcing U.S. securities law against Chinese people on Chinese soil would infringe national sovereignty, Gillis said, while the counter argument is that the companies voluntarily submitted themselves to U.S. regulation when they chose to list in the U.S.

If future document productions fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the Big Four including a six-month ban on audit work. It remains to be seen whether the settlement will be enough to avoid future standoffs.

"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 U.S. listed Chinese companies," said Gillis.

"It is a recognition that access to audit workpapers in China will continue to be a challenge, and the SEC recognizes that a state of constant disagreement and non-cooperation with the CSRC will not advance the SEC's needs or objectives," said Frenkel.

This settlement may make it easier for American and Chinese regulators to resume discussions about how best to address the needs of both sides, said Frenkel.