Why Is The SEC Pursuing Deloitte Shanghai? Looks Like It’s Personal

Why Is The SEC Pursuing Deloitte Shanghai? Looks Like It’s Personal

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.

Ooooh scary!

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 the audit.

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 Global Firm.

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 Shanghai.

(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 not working.)

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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