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Accounting giant finds itself caught between regulators
By Lydia Chen |
September 10, 2011, Saturday
|
Print Edition
Print Edition
THE Shanghai unit of accounting giant Deloitte & Touche is facing a dilemma: to listen to Chinese securities regulator or comply with the regulator in the United States.
The unit has received a subpoena from a federal court, issued at the request of the US Securities and Exchange Commission, asking it to produce records related to possible accounting fraud at Longtop Financial Technologies, a former client.
Deloitte resigned as auditor for the Hong Kong-based Chinese financial software company after uncovering "numerous improprieties" during its audit of the company for the year ended on March 31.
But Deloitte China said yesterday that, despite wishing to cooperate with the SEC, it cannot produce the requested documents without approval from China's own regulatory authorities.
"As a matter of national sovereignty, the law of the People's Republic of China precludes our firm from producing the requested documents to a foreign regulator without approval from China Securities Regulatory Commission," its statement said.
Both Longtop and the Shanghai unit are based in China, and the audit was carried out there, the statement said, adding that the company has passed on the SEC's requests to the Chinese regulators.
"But so far the China regulators have not given us permission to provide papers to the SEC," the statement said. Deloitte China said the situation was "essentially a matter between regulators in China and the United States," adding that the firm would be happy to comply with any agreed outcome.
The Shanghai unit received a first subpoena from the SEC on May 27 requiring it to produce documents in July.
The SEC said Deloitte Shanghai had not produced any documents to date.
As a result, the SEC has been unable to gain access to information that it says is critical to an investigation authorized for the protection of public investors.
Compliance with an SEC subpoena is a legal obligation in the US. Failure to comply may lead to the loss of its registration with the US Public Company Accounting Oversight Board, Paul Gillis, visiting professor of accounting at the Guanghua School of Management at Peking University, told Reuters.
This would have serious implications for US-listed Chinese firms as other auditors might stop working for them.
"This is a culture clash that the SEC is throwing to the courts to resolve," said Jacob Frenkel, a former senior counsel in the SEC's enforcement division.
The subpoena enforcement filed in Washington DC marks the boldest move yet by the SEC against an accounting firm in its crackdown on fraud at Chinese companies that list on US exchanges.
"Compliance with an SEC subpoena is not an option, it is a legal obligation," said Robert Khuzami, the director of the SEC's Division of Enforcement.
"Subpoena recipients who refuse to comply should expect serious legal consequences."
Longtop debuted on the New York Stock Exchange after an initial public offering in 2007. Trading was suspended in May due to the SEC investigation and the company was delisted last month.
The unit has received a subpoena from a federal court, issued at the request of the US Securities and Exchange Commission, asking it to produce records related to possible accounting fraud at Longtop Financial Technologies, a former client.
Deloitte resigned as auditor for the Hong Kong-based Chinese financial software company after uncovering "numerous improprieties" during its audit of the company for the year ended on March 31.
But Deloitte China said yesterday that, despite wishing to cooperate with the SEC, it cannot produce the requested documents without approval from China's own regulatory authorities.
"As a matter of national sovereignty, the law of the People's Republic of China precludes our firm from producing the requested documents to a foreign regulator without approval from China Securities Regulatory Commission," its statement said.
Both Longtop and the Shanghai unit are based in China, and the audit was carried out there, the statement said, adding that the company has passed on the SEC's requests to the Chinese regulators.
"But so far the China regulators have not given us permission to provide papers to the SEC," the statement said. Deloitte China said the situation was "essentially a matter between regulators in China and the United States," adding that the firm would be happy to comply with any agreed outcome.
The Shanghai unit received a first subpoena from the SEC on May 27 requiring it to produce documents in July.
The SEC said Deloitte Shanghai had not produced any documents to date.
As a result, the SEC has been unable to gain access to information that it says is critical to an investigation authorized for the protection of public investors.
Compliance with an SEC subpoena is a legal obligation in the US. Failure to comply may lead to the loss of its registration with the US Public Company Accounting Oversight Board, Paul Gillis, visiting professor of accounting at the Guanghua School of Management at Peking University, told Reuters.
This would have serious implications for US-listed Chinese firms as other auditors might stop working for them.
"This is a culture clash that the SEC is throwing to the courts to resolve," said Jacob Frenkel, a former senior counsel in the SEC's enforcement division.
The subpoena enforcement filed in Washington DC marks the boldest move yet by the SEC against an accounting firm in its crackdown on fraud at Chinese companies that list on US exchanges.
"Compliance with an SEC subpoena is not an option, it is a legal obligation," said Robert Khuzami, the director of the SEC's Division of Enforcement.
"Subpoena recipients who refuse to comply should expect serious legal consequences."
Longtop debuted on the New York Stock Exchange after an initial public offering in 2007. Trading was suspended in May due to the SEC investigation and the company was delisted last month.
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