SEC delays court action seeking Deloitte China audit papers

Wed Jul 18, 2012 1:24pm EDT

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(Reuters) - The Securities and Exchange Commission on Wednesday sought to delay its legal battle with a Chinese unit of accounting firm Deloitte Touche Tohmatsu over audit documents, citing ongoing negotiations with Chinese regulators.

In a filing with a U.S. federal court, the SEC said it wanted a six-month stay so it could try to work out an arrangement with Chinese regulators to get audit documents.

The SEC in September had asked the court to force Deloitte to produce records related to possible accounting fraud at Longtop Financial Technologies Ltd, but Deloitte has resisted, citing Chinese secrecy laws.

Longtop, a China-based company that was listed in the United States, was charged in November with failing to file accurate financial reports.

The SEC has also been negotiating with the China Securities Regulatory Commission (CSRC) on cross-border cooperation, including access to documents. In its court filing on Wednesday, it said no agreement has been reached but talks continue.

The SEC's court action on Wednesday could signal progress in the talks, said Paul Gillis, an accounting professor at Peking University in Beijing who has closely followed the matter.

"I think it hints that a breakthrough is imminent," he said.

DELISTINGS FEARED

Concerns have grown that if no diplomatic solution is found, Chinese auditors could be denied the right to practice before the SEC, leaving hundreds of U.S.-listed Chinese companies without auditors and resulting in delisting.

The SEC has been investigating dozens of China-based companies listed in the United States for accounting irregularities. Those inquiries have stalled amid difficulties in obtaining documents from Chinese auditing firms.

Auditors have said they could be jailed for violating China's state secrets laws if they turn over papers to the SEC.

In July 2012, the SEC said, Chairman Mary Schapiro met with the chairman of the CSRC and discussed developing a mechanism for the SEC to obtain audit work papers and other documents from China-based auditors.

"If these negotiations can develop a viable alternative means by which the SEC can obtain the audit work papers and other documents...it could have a significant impact on the appropriate resolution of this case," the SEC said in its filing.

Deloitte's China unit, Deloitte Touche Tohmatsu CPA Ltd, did not object to the delay, the SEC said.

It is unclear how this filing will impact a separate legal action pending against Deloitte in SEC administrative court. That action also seeks work papers in connection with an SEC investigation into an undisclosed company.

In that administrative action against Deloitte, the SEC said sanctions could include censure or revoking the firm's ability to practice before the commission.

A source familiar with the matter told Reuters last month that the SEC has asked the Chinese arms of the other Big Four auditors - Ernst & Young, PwC, and KPMG - for audit papers as well.

(Reporting By Aruna Viswanatha in Washington and Dena Aubin in New York; Additional reporting by Sarah N. Lynch; Editing by Gerald E. McCormick, Sofina Mirza-Reid, Tim Dobbyn and Andrew Hay)

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