The dispute centres on Beijings refusal to give US regulators access to audit records for nine US-listed Chinese companies, a standoff that has so far focused minds only on the implications for the future of US-traded Chinese stocks.
However, accounting experts say the issue has the potential to not only force Chinese firms to de-list from US markets, it could also put US-based firms with big Chinese businesses in a position where they have difficulty producing audited accounts.
The potential consequences of failure to find common ground are almost too frightening to contemplate, said Thomas Shoesmith, a partner at Pillsbury law firm in a note to clients.
This week, the US Securities and Exchange Commission (SEC) charged the Chinese affiliates of five of the worlds biggest audit firms with violating US securities law, raising fears that it could go on to apply its ultimate penalty banning the affiliates from working on audits of US-listed companies.
If these five accounting firms are barred from practicing before the SEC, it seems certain that companies with major Chinese operations will find it difficult or impossible to find accountants, Shoesmith said.
US firms with major Chinese businesses include fast food group Yum Brands, tech firm Qualcomm and construction equipment maker Caterpillar. Some have begun to show concern about the possible impact of the dispute.
It would impact us and any other US company with significant operations in China, said Yum spokesman Jonathan Blum. Essentially, there would be no auditors in China that the US government would recognise. It will require a diplomatic resolution, I believe, and we are monitoring the situation.
Caterpillar also appeared anxious for a settlement. As this issue revolves around differences between US and Chinese regulators, Caterpillar hopes each side can work to resolve this issue while demonstrating mutual respect and understanding for the laws and regulations of each country, the company said in an emailed response to questions.
Multinationals operating in China commonly use Chinese affiliates of the so-called Big Four audit firms Deloitte, KPMG, PricewaterhouseCoopers (PwC) and Ernst & Young to audit their Chinese business divisions.
These four dominate world auditing to an extent that US firms would have trouble finding alternative auditors for their Chinese businesses if the affiliates of all four were barred.
In China, the affiliates say they are prevented by state secrecy laws from releasing audit papers to US regulators.
Washingtons reach is also hampered by the structure of the auditing groups themselves, which are set up as global networks of legally separate, national affiliates aimed at insulating the groups from difficulties felt in specific jurisdictions.
The standoff is seen as a test of Chinas ability and willingness to comply with international capital-market norms as it takes on the role of global economic superpower. At the same time, US regulators are in largely uncharted waters, with little experience in dealing with foreign defiance.
The SEC began proceedings on Monday against the Chinese affiliates of the Big Four as well as tier-II audit firm BDO. The charges centre on the affiliates refusal to turn over to US authorities the paperwork from audits of nine US-listed Chinese companies suspected of possible wrong-doing.
Months of talks between the Chinese Securities Regulatory Commission (CSRC) and US regulators have failed to reach a solution, and lawyers struggle to see a way forward. The CSRC wont back down on the State Secrecy Law, said James Zimmerman, a lawyer in Beijing at Sheppard Mullin Richter & Hampton.