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Deloitte-China to Pay $20 Million Penalty for Allowing Self-Audits

S.J. Steinhardt
Published Date:
Sep 30, 2022

SEC 240x240 Blue

The Chinese affiliate of Deloitte, known as Deloitte-China, has reached a $20 million settlement with the Securities and Exchange Commission (SEC) for allowing clients to do their own audit work.

The SEC’s order found that, “in the course of numerous audits over multiple years, 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. 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.”

The Wall Street Journal reported that the conduct at issue involved 12 companies, including nine American firms whose financial statements in China were reviewed by Deloitte-China, according to SEC officials.

In addition to the penalty, the firm agreed to “extensive remedial measures,” according the to the SEC. Those measures include a censure of Deloitte-China, and the SEC's order "requires the firm to complete a review and assessment of its policies and procedures by an independent consultant retained by Deloitte Touche Tohmatsu Limited ('Deloitte-Global'), a U.K. entity with which it is indirectly affiliated. The order further requires Deloitte-China to implement a plan to address deficiencies identified by the independent consultant that is approved and overseen by Deloitte-Global, and to subsequently undergo several additional annual reviews. The order also requires Deloitte-China to require additional training over three years for all of its audit professionals who serve U.S. public company audit clients.”

The Financial Times noted that the firm was not charged with violating the Holding Foreign Companies Accountable Act. This 2020 law requires foreign groups trading on U.S. markets to make their audits available for review every three years or be barred from trading on U.S. exchanges.

SEC Chair Gary Gensler said, “While the SEC’s action today does not implicate a violation of the Holding Foreign Companies Accountable Act, the action does underscore the need for the Public Company Accounting Oversight Board (PCAOB) to be able to inspect Chinese audit firms.”

In August, the PCAOB achieved a breakthrough in its efforts to audit the financial statements of public Chinese companies trading in U.S. capital markets. The agreement allows for PCAOB inspectors to enter China and Hong Kong to inspect audit firms and work papers, after the two countries sparred over the issue for roughly 15 years.

A Deloitte-China spokesperson said the settlement brings “closure to a self-reported matter relating to certain deficient procedures identified in 12 PCAOB audits” and pointed out that the SEC “acknowledged the firm’s co-operation and remedial efforts,” The Financial Times reported.

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