US SEC fines Deloitte’s China affiliate US$20m for auditing violations

THE US Securities and Exchange Commission on Thursday fined the Chinese affiliate of Deloitte, 1 of the “Big Four” accounting firms, US$20 million for letting some clients, including foreign companies listed on US exchanges, conduct their own audit work.

Over multiple years, Deloitte’s Chinese affiliate asked some clients to select their own samples for testing and to prepare documentation that gave the appearance that Deloitte-China had tested the clients’ financial statements and internal controls, when there was no evidence it had in fact done so, the SEC said.

Auditors are essential gatekeepers in the financial markets, with both issuers and investors relying on them to critically and independently examine issuers’ financial statements, identify any material misstatements in them, and sign off on them when they are free of material errors.

“We find that Deloitte-China fell woefully short of professional auditing requirements in numerous component audits of Chinese operations of US issuers and audits of Chinese companies listed on US exchanges,” said SEC chair Gary Gensler.

“Investors in US markets should be protected - and have trust in a company’s financial numbers - regardless of whether an issuer is foreign or domestic.”

The SEC’s enforcement action underscores the need for the Public Company Accounting Oversight Board (PCAOB) to be able to inspect Chinese audit firms, Gensler said.

PCAOB inspections help identify weaknesses in firms’ quality control processes, which were at the centre of the SEC enforcement action against Deloitte-China.

A China-US agreement last month allows US regulators, for the first time, to inspect China-based accounting firms that audit New York-listed companies, easing an audit dispute that threatened to boot more than 200 Chinese companies from US exchanges. REUTERS