Deloitte China to pay $20M SEC penalty

Dive Brief:

The Securities and Exchange Commission (SEC) charged the Chinese affiliate of Big Four accounting firm Deloitte with failing to comply with U.S. auditing requirements in connection with certain U.S.-exchange listed companies, announcing a settlement Thursday under which Deloitte China agreed to pay a $20 million penalty.
“Deloitte China personnel asked clients to select their own samples for testing and to prepare audit documentation purporting to show that Deloitte-China had obtained and assessed the supporting evidence for certain clients’ accounting entries,” the SEC press release stated. “This created the appearance that Deloitte-China had conducted the required testing of clients’ financial statements and internal controls when there was no evidence in the audit file that it had in fact done so.”
An emailed statement sent to CFO Dive attributed to Deloitte’s Chinese affiliate said the settlement brings “closure to a self-reported matter relating to certain deficient procedures identified in 12 [Public Company Accounting Oversight Board] PCAOB audits (nine component audits and three foreign private issuer audits).”

Dive Insight:

Both the SEC and the PCAOB have recently been focusing on holding foreign companies listed on U.S. exchanges accountable to the same accounting standards with which companies based in the U.S. must comply.

U.S. audit watchdog the PCAOB announced last month that it had reached a long-sought agreement with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of the People’s Republic of China, marking the first step toward the PCAOB gaining “complete access” to inspect public accounting firms based in mainland China and Hong Kong. At the time, SEC Chair Gary Gensler warned if the PCAOB could not actually inspect and investigate audit firms in China, roughly 200 China-based issues could be de-listed.

While the SEC’s actions do not “implicate a violation of the Holding Foreign Companies Accountable Act,” Gensler in a statement said it underscores the importance of the PCAOB being able to inspect Chinese audits.

The SEC found that the misconduct in connection with Deloitte-China involved both junior and senior executives and reflected a lack of supervision by audit partners. In addition to the financial penalty, Deloitte China will be required by the order to complete a review and an assessment of its policies by an independent consultant retained by a U.K. entity with which it is indirectly affiliated, to address the deficiencies and to require additional training.

Gensler in a statement criticized Deloitte China for falling “woefully short of professional auditing requirements in numerous component audits of Chinese operations of U.S. issuers and audits of Chinese companies listed on U.S. exchanges.”