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Tuesday, October 15, 2019

SEC brings action against Shanghai audit firm

By Michael P. Tremoglie | May 10, 2012

WASHINGTON (Legal Newsline) - The Securities and Exchange Commission announced Wednesday that is implementing an enforcement action against Shanghai-based Deloitte Touche Tohmatsu CPA Ltd.

The action alleges the firm refused to provide the SEC with audit work papers related to an accounting fraud investigation.

This is the first time the SEC has brought an enforcement action against a foreign audit firm for failing to comply with a Section 106 request.

The company is charged with violating the Sarbanes-Oxley Act. This requires foreign public accounting firms to provide audit work papers concerning U.S. issuers to the SEC upon request. D&T Shanghai has failed to provide the documents, the SEC says. It cited Chinese law as the reason for its refusal.

"As a voluntarily registered U.S. public accounting firm, D&T Shanghai cannot benefit from the financial and reputational rewards that come with auditing U.S. issuers without also meeting its U.S. legal obligations," said Robert Khuzami, Director of the SEC's Division of Enforcement.

"Foreign firms auditing U.S. issuers should not be permitted to shield themselves from regulatory scrutiny to the detriment of U.S. investors."

Scott Friestad, Associate Director of the SEC's Division of Enforcement, added, "Without access to work papers of foreign public accounting firms, our investigators are unable to test the quality of the underlying audits and fulfill our responsibilities to investors."

This is the second time the SEC has pursued enforcement against D&T. Last year, the SEC issued a subpoena enforcement action against D&T Shanghai in federal court after the firm failed to produce documents in response to a subpoena related to an SEC investigation into possible fraud by one of its longtime clients, Longtop Financial Technologies Limited. The SEC later filed charges against Longtop for alleged reporting failures.

According to the SEC's current order, SEC staff began seeking D&T Shanghai's audit work papers related to its independent audit work for the client involved in an SEC investigation in April 2010. The SEC served Deloitte LLP, the U.S. member firm, with a subpoena requesting various related documents. Counsel for Deloitte LLP informed the staff that the U.S. firm did not perform any audit work for the client and therefore did not possess the documents related to the subpoena.

According to the SEC's order, the SEC staff was later informed by Deloitte global firm's counsel that the request for audit work papers had been specifically communicated to D&T Shanghai. Subsequently, the staff served D&T Shanghai with a request through Deloitte LLP for the audit work papers pursuant to Section 106 of the Sarbanes-Oxley Act.

D&T Shanghai would not produce the documentation citing that its interpretation of Chinese law prevented it from doing so. According to the SEC its staff also has sought to obtain the relevant audit work papers through international sharing mechanisms. But these efforts have been unsuccessful.

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