The accounting unit of Deloitte in China, Deloitte Touche Tohmatsu CPA, LTC asked a federal court to dismiss a case filed by Securities and Exchange Commission (SEC) to secure audit work papers from the company.
Deloitte Touche Tohmatsu Argues
In a court filing on Tuesday, Deloitte Touche Tohmatsu argued that U.S. regulators have other options to obtain the required documents for its fraud investigation without a court order. China stepped in to resolve the controversy surrounding the Chinese companies, and agreed to allow U.S. regulators to access and review audit work papers from Chinese auditors. The SEC is investigating Longtop Financial Technologies Ltd (NYSE:LFT), a client of Deloitte Touche Tohmatsu.
The lawyers representing Deloitte Touche Tohmatsu argued, “The deal provides the SEC with an additional alternative means to obtain and use the documents requested in its subpoena here – that is, directly from the PCAOB.”
Deloitte Touche Tohmatsu submitted its request with the court a few days after Chinese regulators and the Public Company Accounting Oversight Board (PCAOB) reached a preliminary agreement after two years of standoff which prevented the United States from investigating the alleged accounting anomalies of dozens of Chinese companies listed on the U.S. stock markets.
The temporary agreement is limited as it only allows the sharing of documents that are part of the investigation. It does not allow regulators to conduct routine onsite inspections on the auditing books of Chinese companies trading in the United States. In addition, PCAOB is restricted from sharing documents obtained from auditing firms for its own enforcement action with the SEC.
Over the past several years, the SEC had been investigating the accounting anomalies of a number of Chinese companies. Some companies were delisted from the U.S. stock exchanges after finding accounting irregularities and resignation of auditors.
Last December, the SEC stated that it might de-register the China affiliate auditors of the big accounting firm involved in its investigation if it fails to reach an agreement with Chine regulators. The SEC is also requesting documents from Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), PricewaterhouseCoopers Zhong Tian CPAs Limited, and China Dahua Co. Ltd. The big accounting firms refused to provide documents required by the commission related to its fraud investigation because Chinese secrecy law prohibits it.
SEC Commissioner Luis Aguilar said last week that the agreement between PCAOB and China “has no direct effect on the commission’s pending actions to enforce the obligations” of audit firms in China.
On the other hand, Jim Cox, professor at Duke University School of Law opined, “Deloitte can simply just end the situation by producing the records. This strikes me as little more than a smoke screen, and the SEC would be well advised to keep this matter before the federal court.”