The Securities and Exchange Commission (SEC) has asked a US federal court to force a Chinese unit of accounting giant Deloitte & Touche to produce records related to possible accounting fraud at Longtop Financial Technologies Ltd. The effort by the US regulator to enforce a subpoena against Shanghai-based Deloitte Touche Tohmatsu CPA Ltd underscores the difficulties American regulators face in probing US-listed Chinese companies.
The SEC and the Federal Bureau of Investigation have been probing US-listed Chinese companies and their auditors amid a rash of accounting scandals. Deloitte's China unit said it wished to co-operate with the SEC but that it is unable to give them the requested documents without approval from the Chinese regulatory authorities. "We have passed on the SEC's requests to the regulators in China, as we are required to, but so far the China regulators have not given us permission to provide papers to the SEC," said Hong Kong-based company spokesman Wilfred Lee in an emailed statement.
"This is essentially a matter between regulators in China and the United States; Deloitte China is happy to comply with any outcome that is agreed between them," he added. The Deloitte unit abruptly resigned in May after uncovering "numerous improprieties" during its audit of the Chinese software company for the year ended March 31. The case could mark a major escalation in the diplomatic battle between the two countries to allow American regulators access to US-listed Chinese firms, accounting experts said.
"This is the biggest thing that has happened in the transitional regulation of accounting in history," said Paul Gillis, visiting professor of accounting at the Guanghua School of Management, Peking University. A failure by Deloitte to comply with the SEC order may lead to the loss of its registration with the US Public Company Accounting Oversight Board (PCAOB), Gillis said, a move that would have serious implications for US-listed Chinese firms as other auditors might stop working for them.
"The nightmare scenario for a lot of people would be that the court directs the PCAOB to revoke Deloitte's registration," said Gillis. "A lot of these US-listed stocks have just become riskier because the listings of these companies may be in jeopardy if all these accounting firms have to bail out."
The SEC said Deloitte had argued it should not be required to produce documents that pre-date the 2010 Dodd-Frank Wall Street oversight law, and that producing any documents could subject it to sanctions under Chinese law. "This is a culture clash that the SEC is throwing to the courts to resolve," said Jacob S. Frenkel, a former senior counsel in the SEC's enforcement division and now a partner at Shulman Rogers Gandal Pordy & Ecker. The subpoena enforcement filed in the US District Court in Washington D.C. marks the boldest move yet by the agency against a big accounting firm in its crackdown on fraud at Chinese companies that list on US exchanges. Next month, US and Chinese accounting watchdogs are due to meet in Washington for a second round of talks on joint inspections of auditing firms in China.
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