The Securities and Exchange Commission is rattling a dull
sabre again towards Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. for its
refusal to provide the agency with audit work papers related to Longtop, a
China-based company under investigation for potential accounting fraud against
U.S. investors. The regulator filed an "enforcement action"
instituting an "administrative proceeding" yesterday.
This has been going
on now for two years and seems to have escalated into the kind of fight men
have when trying to prove who's bigger and tougher. It looks to me like it's
personal rather than productive. The SEC has access to as much as they need to
review the work of the Deloitte China firm's audit of Longtop - or any
other Chinese fraud for a US listed company - assuming
the US Deloitte firm had as much as they needed to sign off on the
companies' filings with the SEC over the years.
The SEC admits in their latest
complaint against Deloitte Shanghai that they asked Deloitte US for the
information the firm has right here in the US on Longtop and other US listed
foreign based audits. The firm's first answer was to deny any involvement in
4. On April 9, 2010, staff served Deloitte LLP, the U.S.
member firm of the Global Firm with a subpoena requesting audit work papers
relating to the Global Firm's audit of Client A's financial statements for the
period January 1, 2008 through April 9, 2010.
5. Between April 13, 2010 and May 18, 2010, staff had
several communications with U.S. based counsels for both Deloitte LLP and the
6. Counsel for Deloitte LLP initially informed the
staff that Deloitte LLP did not perform any audit work for Client A, that all
audit work was conducted by Respondent, and that Deloitte LLP did not have
possession, custody, or control of the documents called for by the subpoena.
7. Counsel for Deloitte LLP subsequently informed the
staff that Deloitte LLP performed some review work of Client A's periodic
reports and produced certain documents relating to this review to the staff.
Deloitte did eventually produce some documents
related to the audit that are, and always have been, available in the US. If
the Deloitte US reviews were sufficient, that should be enough for the SEC to
see the quality of work performed by the Deloitte Shanghai unit.
So why is SEC continuing to fight this inane fight when,
in reality, they should have all the information they need to investigate the
Longtop or any other fraud? I suspect that the SEC attorneys are super annoyed
with Deloitte's lawyers and have decided to use their unlimited budget and
intimidating administrative powers to annoy them back. Unfortunately, this just
puts more money in the pocket of the super
expensive Sidley & Austin outside counsel representing Deloitte
(Coincidentally, it was also a Sidley & Austin lawyer
for KPMG that recently so
annoyed a judge in a class action overtime case against the firm the judge
ordered the firm to preserve the hardrives of all laptops for past, present and
future class members. Note to Sidley & Austin: Scorched earth tactics
US-based GAAP and SEC reporting experts in the global
audit firms review the workpapers behind the filings for every non-US based
audit client that is listed on a US stock exchange, all over the world, before
any filing with the SEC. That's one of the quality control procedures all the
firms who audit foreign-based, US listed multinationals have in place, not only
because it is expected by regulators but because it's good business.
The SEC/GAAP reporting team or Reg S-X review team - it
may be drawn from and called something different in each firm - is the last
stop before a foreign-based US issuer can file its quarterly and annual
reports, as well as any filings for additional stock or debt offerings, with
the SEC. Sometimes the team consists of experts from the firm's financial
advisory consulting group or capital markets group - the professionals who help
companies prepare for IPOs, especially foreign companies who want a stock
exchange listing in the US. The team may also call on additional expertise from
the firm's national office - a kind of one-stop shop for getting questions
answered on arcane technical matters or standards for specific industries.
Professionals may play double duty as consultants to some companies and remote
members of an audit team for others. That way they can pick up billable hours
reviewing filings when there are no deals to be done.
When a US-based listed company is a multinational, the US
audit firm will use its member firm network extensively to do the audit work
necessary all over the world to support the overall audit opinion. In this
case, a US audit firm is expected to closely supervise and control the work of
foreign affiliates who contribute to its audit.
Read this article in its entirety at the re: The Auditors, a blog
by Francine McKenna.
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