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Friday, May 18, 2012

Deloitte Shanghai Unit Continues to be Challenged by the SEC to Produce Documents

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 On April 25, 2012 the Securities and Exchange Commission sought and was granted a 3 week extension by the U.S. District Court for the District of Columbia to respond to Deloitte Touche Tohmatsu CPA Ltd’s (DTTC) request to quash the subpoena regarding audit services performed for Longtop Financial Technologies Ltd. and instead require the SEC to go through the Hague Convention diplomatic process.

As if in response to DTTC’s argument about proper diplomatic procedures, on May 9, 2012 the SEC filed an unprecedented Sarbanes- Oxley Act Section 106 administrative suit against DTTC for “willfully” failing to provide documents to the agency regarding another as yet unidentified client. This client, like Longtop, is under investigation by the SEC for alleged financial fraud.

The SEC first requested the Shanghai branch to produce these documents under the SOX provision a year ago. In a recent statement to Bloomberg BNA, DTTC spokeswoman Lauren Misratta said the requested documents had been provided to the Chinese securities regulatory commission “with the hope” it could reach an agreement with the SEC.

Section 106 applies to foreign public accounting firms that prepare or furnish audit reports and specifically holds those firms to the same laws and jurisdiction as a U.S. accounting firm. Section 106 (b) deems a foreign firm to have consented to produce its audit work-papers for either the Public Company Accounting Oversight Board or the commission if the firm issues an opinion or performs material services.

In June 2004 DTTC registered with the PCAOB in order to provide services to U.S. companies, of which Longtop was among one of the 48 companies it worked for.

For more than a year the SEC has been investigating accounting irregularities and other problems at Chinese companies that are listed on U.S. stock exchanges. These investigations have led to many auditors at these firms resigning.

In their May 22, 2011 resignation letter to Longtop , DTTC complained that they suffered “threats to stop our staff leaving the Company premises unless they allowed the Company to retain our audit files then on the premises; and then seizure by the Company of certain of our working papers.”

DTTC is once again forced to argue that its position is untenable, caught in the middle of two different government’s conflicting laws. The Chinese government has categorically refused to allow the Chinese Securities Regulatory Commission to give the documents to the SEC. DTTC’s argument that diplomacy is the only solution has been echoed by the other members of the Big Four accounting firms where China is a crucial market for now, at least until their joint venture deals expire over the next 3 years.

There is some concern over how this pressure by the SEC will affect the recent breakthrough in Beijing earlier this month during the annual United States- China strengthening talks. During the talks China had tentatively agreed to allow PCAOB officials to observe Chinese authorities inspecting audits done in China of U.S. listed companies. Though the PCAOB under U.S. law is required to inspect auditors of all U.S. –listed companies, China has never allowed inspectors to do this because of sovereignty concerns. While allowing observations is not a substitute for joint inspections, nevertheless, Jim Doty, chairman of the PCAOB, expressed satisfaction about the progress but cautioned that “one can never guarantee the outcome of this.”

By Laura Salisbury
Legal Editor
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