A US Security and Exchange Commission (SEC) judge has suspended the Chinese units of the so-called 'Big Four' accounting firms including Deloitte and KPMG for refusing to release audit information on China-based firms listed in the US.
SEC Administrative Law Judge Cameron Elliot suspended the Chinese subsidiaries of Deloitte & Touche, Ernst and Young, KPMG, and PricewaterhouseCoopers, saying they united had "willfully violated" US laws.
The China-based affiliates - BDO China Dahua, Deloitte Touche Tohmatsu Certified Public Accountants, Ernst & Young Hua Ming, KPMG Huazhen, and PricewaterhouseCoopers Zhong Tian refused to present data about companies based in China and listed in the US, saying they tried to comply with Chinese secrecy laws.
The US Securities and Exchange Commission (SEC) said it was satisfied with the decision.
"These records are critical to our ability to investigate potential securities law violations and protect investors," said Matthew Solomon, the chief litigation counsel in the SEC's Enforcement Division, as quoted by the BBC.
But the four firms in China called the decision "regrettable" and said they will appeal.
"In the meantime the firms can and will continue to serve all their clients without interruption," Deloitte Touche, PricewaterhouseCoopers, KPMG and Ernst & Young announced in a joint statement.
The ruling does not go into effect immediately.
Analysts, meanwhile, are concerned over the consequences if the initial ruling stands, which could complicate audits of many Chinese firms listed in the US, as well as American companies doing business in China.
"This decision will be a huge shock in Beijing," Paul Gillis, an accounting professor at Peking University in Beijing, told the BBC.
"The Securities and Exchange Commission has pushed a lot of chips out on the table."
The US Public Company Accounting Oversight Board (PCAOB), which regulates auditors of US-listed companies, has been negotiating with Chinese authorities to gain access to the audit documents.
The ruling by the SEC should come as no surprise to the Big Four accounting firms since the matter has remained a source of mutual irritation between the economic powerhouses for some time.
Investor confidence has taken a blow amid persistent claims of fraud and inefficient auditing standards at some of the Chinese units. This has prompted US regulators to demand access to auditing files held in China by the firms.
In December 2012, for example, the SEC charged the China units of the Big Four accounting firms with violating the Securities Exchange Act and the Sarbanes-Oxley Act, which demands foreign public accounting firms turn over to the SEC upon requests information on any firm publicly traded on US markets.
"Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud,” said Robert Khuzami, Director of the SEC's Division of Enforcement. “Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions."
It was at that time that the SEC said it would schedule a hearing and determine the appropriate legal action against the firms.