UPDATE 1- U.S. probe into Chinese client deals fresh challenge to Deloitte

July 31 (Reuters) - A U.S. probe into the accounts of one of China’s largest private education providers is a fresh challenge to its auditor Deloitte Touche Tohmatsu, which has run into more problems with New York-listed Chinese clients than other Big Four auditing firms.

The Securities and Exchange Commission (SEC) is investigating New Oriental Education & Technology Group Inc for possible accounting irregularities, the Beijing-based firm said on July 17. Deloitte has audited New Oriental since it went public in 2006.

Deloitte has been the slowest of the Big Four to expand in China, missing out on many major state-owned firms as clients. As a result, it has signed up more privately owned companies looking to list in the United States where rules are more flexible in allowing firms with a shorter operating track record to go public.

On Monday, another China-based Deloitte audit client, Suntech Power Holdings, said it might have been defrauded by a fake collateral pledge on 550 million euros ($673.33 million) of financing it extended to a business partner. Suntech is the world’s biggest solar panel maker.

“It’s been my experience that Deloitte China’s due diligence, when it comes to taking on clients, is substantially similar to that conducted by other major audit firms,” said John Huber, senior managing director at global business advisory firm FTI Consulting and former head of the SEC’s corporate finance division. Huber has not been a Deloitte employee.

Nevertheless, auditing Chinese firms has been a challenge for Deloitte. Since January last year, it has resigned or has been dismissed from audit roles it held with seven U.S.-listed Chinese companies, according to data from research firm Audit Analytics.

In five of those instances, it was due to difficulty verifying the accounts or alleged illegal behaviour by the company. Reasons were not disclosed for the other two.

No evidence suggests any of Deloitte’s departures involved wrongdoing on its part.

PricewaterhouseCoopers has departed from five companies, KPMG three, and Ernst & Young two, according to Audit Analytics.

“Experience shows that financial issues can arise at any company whether large or small, listed or private,” Deloitte China said in a statement.

Deloitte has 44 U.S.-listed Chinese clients compared with PwC which has 31, Ernst & Young 25 and KPMG 18, according to data compiled last November by Paul Gillis, professor of accounting at Peking University.

Deloitte’s China roster includes Agricultural Bank of China , the country’s fourth-largest bank by market value.

While all have had clients with accounting problems from China, Deloitte holds the record of having had the most, according to Muddy Waters, a research firm and short-seller.

“There are likely a number of problem audit clients at other Big Four firms to be unearthed. However, Deloitte is leading the pack in this measure,” Muddy Waters wrote in its report on New Oriental.

Deloitte China said its total portfolio of listed clients contains many large and well-established companies.

“U.S.-listed Chinese companies facing issues represent just a minuscule proportion of our total portfolio of listed companies,” the firm said.

On the latest disclosure by Suntech, Deloitte China said it is monitoring developments closely but was unable to comment further due to client confidentiality.

Shares in Suntech fell more than 15 percent on Monday following its announcement that its partner in a solar development fund may have pledged fake German bonds in exchange for hundreds of millions of euros of financing.

Suntech said there is no indication that any of its management were involved in the fraud. GSF Capital, its partner in the fund, could not be reached for comment.

Deloitte has yet to sign off on the accounts of New Oriental for the year ended May 31, according to the company’s chief financial officer.

Since the firm said on July 17 it was being investigated, around $1.6 billion has been wiped off New Oriental shares.

A day later, Muddy Waters said New Oriental had lied about its network of schools and learning centres being company-owned, alleging the numbers had been inflated.

Muddy Waters says it has seen contracts indicating New Oriental operates some of its outlets via franchises.

New Oriental has denied the allegations from Muddy Waters, which gained prominence last year from finding accounting problems at Chinese firms and shorting their shares. The short-seller has misinterpreted its financials, New Oriental said.

Deloitte has said it will cooperate with the SEC and consider the appropriate and necessary response to the Muddy Waters report.


The SEC has probed dozens of U.S.-listed Chinese companies since the start of 2010.

Its inquiries have run into snags because of difficulties getting documents from auditing firms, which say they could be jailed for violating China’s state secrets laws if they turn over papers to the U.S. regulator.

In the first half of 2012 alone, 19 Chinese companies were de-listed in the United States, either due to accounting and regulatory problems or because of a slump in investor confidence in China-based stocks.

One high-profile blow-up was Longtop Financial Technologies Ltd, which Deloitte quit as the company’s auditor.

Deloitte alleged the Chinese software company, which was de-listed late last year, had tried to falsify its financial statements and attempted to stop Deloitte staff from leaving the company’s premises when the discrepancies were uncovered.

Calls and emails to Longtop for comment went unanswered.

The SEC in September last year asked a federal court to force Deloitte to produce records related to possible accounting fraud at Longtop, but Deloitte has resisted, citing Chinese secrecy laws. It was also charged by the SEC in May for refusing to produce documents from the audit of an unnamed China-based company.

Those actions were suspended on July 18 when the SEC said it wanted to work on an alternative solution with Chinese authorities to get access to documents.

Deloitte is the only member of the Big Four to have faced SEC enforcement action in relation to the production of China working papers. A source told Reuters in June that the other three major audit firms had been asked to turn over audit papers to the U.S. regulators.

Aside from Longtop, Deloitte was auditor on another Chinese company that was thrown off U.S. exchanges last year -- China MediaExpress Holdings.

Deloitte resigned as the company’s auditor in March 2011, having raised concerns as to the authenticity of its financial statements. The company had earlier faced allegations from Muddy Waters that it had inflated sales figures.

China MediaExpress has not filed financial results since Deloitte’s resignation and an investigation into the concerns raised by the auditor is ongoing. The company did not reply to emails and calls from Reuters for comment.

Deloitte also endured a tough year-end reporting season in Hong Kong this year when it resigned from two mainland Chinese companies -- Boshiwa International Holdings and Daqing Dairy Holdings -- due to concerns about their accounts.

Boshiwa International’s shares have not traded since Deloitte’s resignation in March.

A spokeswoman for the company referred to stock exchange announcements from Boshiwa that it appointed a new auditor in May, though it is yet to publish its annual accounts.

Daqing Dairy shares have also not traded since Deloitte’s resignation, and the company said it is still trying to hire a new auditor. The company could not be reached for comment.