The Shanghai office of accounting firm Deloitte was hit with a subpoena enforcement action on September 8 by the US Securities and Exchange Commission (SEC), ordering the former to produce documents related to the SEC investigation into possible fraud by the accounting firm former client, software firm Longtop Financial Technologies Ltd.
The SEC previously issued the firm, Deloitte Touche Tohmatsu CPA Ltd., with a subpoena on May 27 requiring it to produce documents by July 8, 2011, which it failed to do.
ompliance with an SEC subpoena is not an option, it is a legal obligation, said Robert Khuzami, Director of the SEC Division of Enforcement. ubpoena recipients who refuse to comply should expect serious legal consequences. /p>
Deloitte China responded on September 9 with a press release that said, under Chinese law, the firm could not hand over such documents to a foreign regulator without approval from the China Securities Regulatory Commission (CSRC).
China business commentator Doug Young told Asia Outbound that the development would prolong the confidence crisis surrounding US-listed Chinese firms, which have been targeted by short-sellers and accusations of widespread accounting fraud.
eople see these big auditing names on financial statements as a sign of approval that everything is okay. When this is called into doubt, it raises further questions, as a lot of big Chinese companies use these auditing firms, he said.
A second round of talks between accounting authorities from the US and China on joint inspections of Chinese auditing firms is due to be held in Washington DC next month. Because of the negative impact on the reputation of Chinese companies, Young said that China will be just as eager to come to an effective agreement as the US.
hina and the US need to reach an agreement and give the SEC full access to these firms as a really important step in restoring confidence in these companies. I wouldn't be surprised if we see more of these accounting firms resigning from some of their clients, as they are probably now doing careful reviews, said Young.
Paul Gillis, visiting professor of accounting at the Guanghua School of Management, Peking University, told Reuters that the subpoena enforcement action is he biggest thing that has happened in the transnational regulation of accounting in history. /p>
lot of these US-listed stocks have just become riskier because the listings of these companies may be in jeopardy if all these accounting firms have to bail out, he said.
Cayman-registered Longtop is a foreign private issuer whose American depositary shares (ADSs) traded on the NYSE from the date of its initial public offering in October 2007 until May 17, 2011, when the NYSE halted trading prior to delisting Longtop securities in August 2011.
When trading was halted, Longtop ADSs were priced at $18.93 per share with 57 million shares outstanding, resulting in a market capitalization of approximately $1.08 billion.
Deloitte Touche Tohmatsu CPA Ltd. resigned as Longtop's auditor in May, citing umerous improprieties during its audit for the year ended March 31. It had been working for Longtop since at least 2007, according to the SEC's press release.
