[ by Melanie Gretchen and Howard Haykin] The SEC charged Deloitte Touche Tohmatsu CPA Ltd for refusing to provide audit work papers related to a Chinese company that is under investigation for accounting fraud.  This is the second time the firm has come under SEC fire: last year, the agency filed an action against the firm, accusing it of failing to turn over documents in connection with Longtop Financial Technologies, which Deloitte Shanghai had audited. SEC Findings and Allegations. Deloitte & Touche Shanghai violated a provision in the 2002 Sarbanes-Oxley Act, which requires foreign public accounting firms to provide their work papers concerning companies that trade in the United States to the SEC upon request, the complaint said. "Without access to work papers of foreign public accounting firms, our investigators are unable to test the quality of the underlying audits and fulfill our responsibilities to investors" --Scott Friestad, an associate director in the SEC's enforcement division. Caught in the Middle. A Deloitte spokesperson said that Chinese law prohibits the firm from handing over documents to a foreign regulator without approval from the government.  Further, the firm provided the relevant audit documents to Chinese regulators upon their request.  Once that was completed, Deloitte anticipated that CSRC, China's securities regulator, would provide the SEC with access.  Unfortunately that has not happened. In 2011, after the documents were in China's possession, Deloitte received an SEC request for those same documents.  According to the spokesperson, "Deloitte Shanghai 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."

[C-I Note: SEC Cooperation Agreement with China's Regulator. The SEC website has on record that, in May 2006, the Commission announced the fact that it had entered into a new relationship to increase cooperation and collaboration with the China Securities Regulatory Commission ("CSRC").

One can only presume that, the SEC followed up by requesting the CSRC to provide the SEC staff with access to the audit documents, as well.  Apparently that never happened - so much for the bilateral agreement.

For further details about the SEC-CSRC 'MOU', click on the C-I story posted 5/10/11 in Behind the News.]

Larger Problem. The SEC's investigation into Deloitte is the latest effort by the agency to crack down on accounting problems that have come to light at numerous Chinese companies listed on U.S. stock exchanges - largely through "reverse mergers."  The SEC recently has brought at least 6 cases against U.S.-listed Chinese companies, including Longtop and Puda Coal, and accounting irregularities and other problems have prompted the resignation of many of the auditors of these companies.  They've also prompted U.S. stock exchanges to delist or halt trading. Going forward, the SEC and PCAOB, or Public Company Accounting Oversight Board, which oversees U.S. auditors, have been working for months to reach an agreement with Chinese officials that will allow better oversight and inspections of audits done in China of U.S.-listed companies.  Although the PCAOB is required to inspect auditors of all U.S.-listed companies, China has not allowed its inspectors in the States because of sovereignty concerns. For further details, go to [Reuters, 5/9/12].