11 May 2012

Deloitte in Catch 22 over former Chinese client

Deloitte Touche Tohmatsu is facing a legal challenge over conflicting laws between the Chinese and US governments

Its Shanghai practice is facing an enforcement action from the US Securities and Exchange Commission after the firm refused to provide audit work papers relating to its Chinese-based client Longtop Financial Technologies.

Yet the firm claims it cannot comply with the SEC’s request because it is prevented from doing so by Chinese law. If it did so, it says, it would place itself and its personnel at “substantial risk of prosecution” under Chinese criminal law.

In a statement, the firm said: “Deloitte Shanghai is caught in the middle of conflicting laws of two different governments. Accounting firms in China are not permitted to produce documents directly to any foreign regulator without Chinese government approval.”

Longtop, which is a Cayman-based software development and solutions provider targeting the financial services industry in China, is currently under investigation for fraud.

In May last year, the SEC halted trading in Longtop shares on the New York Stock Exchange after DTT abruptly resigned as auditors. The firm said that it has become aware that the company had falsified company records relating to cash at bank and loan balances and possibly sales revenue.

The firm had also faced deliberate interference in the audit process by certain members of the Longtop management, as well as unlawful detention of DTT audit files.

DTT also stated that it was no longer able to rely on management representations in relation to prior year financial reports, that continued reliance should no longer be placed on it audit reports on the previous financial statements, and that it no longer wished to be associated with any of the company’s financial communications in 2010 and 2011.

The SEC said that it had been trying for more than two years to obtain the documents from DTT with no success.

The firm is being charged with violating the Sarbanes-Oxley Act which requires foreign public accounting firms to provide the SEC with audit work papers concerning US issuers.

“As a voluntarily registered US public accounting firm, D&T Shanghai cannot benefit from the financial and reputational rewards that come with auditing US issuers without also meeting its US legal obligations,” said Robert Khuzami, director of the SEC’s enforcement division.

“Foreign firms auditing US issuers should not be permitted to shield themselves from regulatory scrutiny to the detriment of US investors.”

The SEC added that, without access to the work papers of foreign public accounting firms, its investigators were unable to test the quality of the underlying audits and fulfil the regulator’s responsibilities to investors.


Julia Irvine