THE SEC FILES A SECOND ACTION AGAINST A SHANGHAI AUDIT FIRM
Chinese issuers are a current focus for the Commission and the class action bar. The Commission has brought a number of actions involving issuers based in the Peoples Republic of China including dozens of proceedings to under Exchange Act Section 12(j) to revoke their registration statement. One of the largest group of class actions brought last year involved Chinese issuers.
Now the Commission brought a second action against PRC based Deloitte Touche Tohmatsu Certified Public Accountants or D&T Shanghai. This action is based on Rule 102(e)(1)(iii) which concerns willful violations of the federal securities laws. The Order alleges violations of SOX Section 106(b) which requires that foreign public accounting firms produce work papers on the request of the PCAOB or the SEC in connection with any investigation of one of its audit reports. The issuer is not identified. In the Matter of Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Adm. Proc. File No. 3-14872 (May 9, 2012).
Respondent D&T Shanghai is a PBAOC registered public accounting firm based Shanghai, the PRC. Since April 2010 the staff has made extensive efforts to obtain the work papers related to â€œClient A.â€ Subpoenas were served on Deloitte LLP, the U.S. member firm of the Global Audit firm. The U.S. firm subsequently produced papers related to certain review work it conducted. That firm also informed the staff that all of the audit work for Client A was done by D&T Shanghai.
The Global Firm informed the staff that it did not have the audit work papers being sought. Rather, that work was done by Respondent who would not produce the papers because, in its view, PRC law precluded such action. International sharing mechanisms failed to yield the requested work papers.
The Order alleges that the failure to produce the requested work papers constitutes a violation of SOX Section 106(b). Under that Section firms such as Respondent consent to producing work papers by registering with the PCAOB. Since Respondent did in fact register, it has an obligation to produce the work papers.
The Order directs that a hearing be held. The remedies which might be sought are not specified.
The first proceeding brought against the audit firm by the Commission was a subpoena enforcement action, filed in September 2011. That case relates to its audit work for Longtop Financial Technologies Ltd., a Cayman Island company based in Shanghai whose ADRs were traded in New York. There the firm resigned from the engagement as outside auditors in a letter dated May 23, 2011 after discovering numerous improprieties during the year end audit. D&T Shanghai is alleged in that proceeding to have not complied with a Commission investigative subpoena for the audit work papers. Subsequently, the SEC initiated an Exchange Act Section 12(j) proceeding against the issuer. Its registration was revoked in December 2011 after the firm failed to answer in the proceeding. In the Matter of Longtop Financial Limited, Adm. Proc. File No. 3-14622 (Order dated December 14, 2011).