The S.E.C. v. D & T Shanghai


The global accounting firms have been swept up in the accounting scandals that have plagued many Chinese firms listed on American stock exchanges.

Most notably, in May of last year, the Securities and Exchange Commission filed an administrative action against the Shanghai office of Deloitte and Touche for refusing to provide audit work papers related to one of its clients. The unidentified Chinese client has been under investigation by the S.E.C. for accounting fraud since 2010.

Deloitte Touche Tohmatsu CPA Ltd. had provided the documents to the China Securities Regulatory Commission at the request of the S.E.C., but argued that it could not provide them to United States regulators under Chinese law.

The American regulatory mandate extends all the way to China due to the fact that many Chinese firms choose to list on American stock exchanges while using auditors based in China. Under the Sarbanes-Oxley law, American regulators are obliged to conduct periodic inspections of the auditors of all firms listed on U.S. exchanges. 

This appears to be the first time that section 102-e of the SOX has been cited in an enforcement action. That provision requires that auditors of foreign companies whose securities are registered in the United States provide audit work papers when asked to do so by the S.E.C.

This action against D&T Shanghai came on the heels of an earlier one in which the S.E.C. asked a federal judge to uphold a subpoena demanding that the same office provide work papers related to its audit of Longtop Financial. Longtop’s stock price collapsed after D&T Shanghai discovered fraud in the course of its audit. That case is still pending.

The consequences could be severe if the Chinese government continues to challenge international regulatory cooperation. Penalties under section 102-e range from censoring the Chinese affiliate to barring it from certifying the audits of companies whose securities are traded in the United States.

American and Chinese officials have met to work toward a diplomatic resolution to the conflict. In September of last year, the S.E.C. requested a six month stay of the charges in order to continue discussions with the Chinese government.


Topics:  Accounting Fraud, China, Enforcement Actions, Sarbanes-Oxley, SEC

Published In: Business Torts Updates, Finance & Banking Updates, International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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