May 9, 2012 / 4:51 PM / 7 years ago

SEC charges Deloitte unit over audit work papers

WASHINGTON (Reuters) - U.S. securities regulators on Wednesday charged Shanghai-based Deloitte Touche Tohmatsu CPA Ltd for refusing to provide audit work papers related to a Chinese company that is under investigation for accounting fraud.

The administrative proceedings against the Deloitte affiliate by the Securities and Exchange Commission marks the latest effort by the agency to crack down on accounting problems that have come to light at numerous Chinese companies listed in the United States.

It is also the second time since last year the SEC has taken enforcement action against the firm for refusing to turn over documents in connection with a Chinese company under investigation.

In this latest action, the SEC alleges that Deloitte & Touche Shanghai violated a provision in the 2002 Sarbanes-Oxley Act which requires foreign public accounting firms to provide their work papers concerning companies that trade in the United States to the SEC upon request.

“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,” said Scott Friestad, an associate director in the SEC’s enforcement division.

Lauren Mistretta, a Deloitte spokeswoman, said that Chinese law prohibits the firm from handing over documents to a foreign regulator without approval from the government.

She said that the Chinese Securities Regulatory Authority asked Deloitte for the documents in 2010 at the request of the SEC, and the firm handed them over to Chinese regulators “with the hope that the CSRC and the SEC would be able to reach an agreement.”

“Unfortunately, that has not happened,” she said.

She said the SEC later requested the documents from the firm directly in 2011.

“Deloitte Shanghai is caught in the middle of conflicting laws of two different governments. This is a profession-wide issue and not one that is specific to Deloitte Shanghai,” she added.

For more than a year the SEC has been probing accounting irregularities and other problems at Chinese companies that are listed on U.S. stock exchanges.

The accounting issues have led to the resignations of many of the auditors of these companies, and have also prompted U.S. stock exchanges to delist or halt trading.

The SEC has brought at least six cases against U.S.-listed Chinese companies, including Longtop Financial Technologies and Puda Coal.

The SEC’s first action against the China-based Deloitte unit last year was filed amid allegations that the firm failed to turn over documents in connection with Longtop, which Deloitte Shanghai audited.

That case is still pending in a U.S. district court. Last month, Deloitte asked the court to quash the SEC action and force the SEC to go through the Hague Convention process to seek foreign documents before it attempted to use U.S. courts to do so. A hearing in the case is scheduled for next month.

In the administrative action filed on Wednesday, the SEC did not disclose which company is at the center of the documents dispute with Deloitte, calling it only “Client A.”

The case comes at a sensitive time for diplomatic relations between Chinese and U.S. securities regulators.

The SEC and Public Company Accounting Oversight Board, which oversees U.S. auditors, have been working for months to reach an agreement with Chinese officials that will allow better oversight and inspections of audits done in China of U.S.-listed companies.

Though the PCAOB is required to inspect auditors of all U.S.-listed companies, China has not allowed its inspectors in that country because of sovereignty concerns.

The head of the PCAOB, Jim Doty, said on Tuesday that U.S. officials are close to an agreement that will allow the PCAOB to observe audit inspections in China, a first step toward doing joint inspections with the Chinese. “There’s every reason to believe we could do the observations in the fall, possibly even the summer,” Doty said in an interview with Reuters.

Paul Gillis, an accounting professor at Peking University in Beijing, said he feared this latest SEC action could hamper Doty’s ability to iron out a deal.

“The SEC can be pretty independent,” he said. “My fear right now is that this action has the same effect as the subpoena - putting a chill on the progress that Doty has made.”

He added that the SEC’s action “ups the stakes” against Deloitte.

“The worst case is that the administrative law judge will revoke Deloitte China’s right to practice before the SEC, costing it all of its U.S. listed companies,” he said.

Reporting by Sarah N. Lynch and Aruna Viswanatha; Additional reporting by Dena Aubin in New York.; Editing by Gerald E. McCormick and Carol Bishopric

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