After struggling for two years to get its hands on auditing documents for a Chinese company listed in the U.S., the Securities and Exchange Commission is ratcheting up the pressure on the Chinese arm of Deloitte LLP. On Wednesday the SEC announced an enforcement action against Shanghai-based Deloitte Touche Tohmatsu for allegedly running afoul of federal securities laws and violating Sarbanes-Oxley Act rules that require foreign auditors to turn over work papers concerning U.S. issuers.
The SEC’s administrative order initiating the case doesn’t name the Deloitte client for which it’s seeking records, but the enforcement action comes as Deloitte’s lawyers at Sidley Austin have been battling SEC regulators over audit papers for a Chinese software maker called Longtop Financial Technologies Limited. Deloitte Touche Tohmatsu resigned as Longtop’s auditor last spring, after the company said its annual reports from 2008 to 2010 weren’t reliable. The SEC filed administrative proceedings against Longtop in November, claiming the company failed to file current and accurate financial reports.
The SEC sued Deloitte Touche Tohmatsu in U.S. District Court in Washington, D.C., last September to enforce a subpoena for its Longtop records. In papers filed in the case last month lawyers for Deloitte at Sidley Austin argued that complying with the SEC’s request for the Longtop audit documents would cause the accounting firm to violate Chinese law and “disobey an express directive of its primary [Chinese] regulator.” The case is widely viewed as a test of the SEC’s ability to subpoena foreign accounting firms under new rules enacted by Dodd-Frank.
Our call to Sidley’s Michael Warden was forwarded to a Deloitte spokesperson. In a statement, the company said its Shanghai unit “is caught in the middle of conflicting laws of two different governments.”
“This is a profession-wide issue and not one that is specific to Deloitte Shanghai,” Deloitte said in the statement. “Because the China legal impediments apply to all accounting firms in China, if a diplomatic resolution is not reached, it is likely that all of the major accounting firms in China will find themselves having to choose between violating their own national laws or facing a similar [SEC action].”
A political compromise could be in the works, though it’s not clear how it would affect the new enforcement action or the D.C. litigation. Reuters reported earlier this week that the chairman of the Public Company Accounting Oversight Board, the agency that oversees the audit industry in the U.S., said a recent breakthrough in talks between U.S. and Chinese officials will allow U.S. officials to observe audit inspections in China.
SEC enforcement chief Robert Khuzami, meanwhile, didn’t seem especially focused on diplomacy in Wednesday’s announcement of the enforcement action against Deloitte. “As a voluntarily registered U.S. public accounting firm, D&T Shanghai cannot benefit from the financial and reputational rewards that come with auditing U.S. issuers without also meeting its U.S. legal obligations,” Khuzami said in a statement. ”Foreign firms auditing U.S. issuers should not be permitted to shield themselves from regulatory scrutiny to the detriment of U.S. investors.”
The SEC’s enforcement against the auditor is set to be assigned to an administrative law judge at the agency.
This article originally appeared in The AmLaw Litigation Daily.
