US to drop legal action against Deloitte over China accounting
Securities and Exchange Commission drops subpoena action seeking records of Longtop Financial Technologies after the China Securities Regulatory Commission hands them over
The US Securities and Exchange Commission (SEC) moved on Monday to drop its action against multinational accountancy firm Deloitte Touche Tohmatsu for the records of a US-listed Chinese company after authorities in Beijing released them.
In a case that had placed it at odds with its Chinese counterpart, the China Securities Regulatory Commission (CRSC), the SEC had sought in 2011 to force Deloitte to turn over audit records for Longtop Financial Technologies, which it was investigating for possible fraud.
Deloitte’s China arm refused to do so, saying it was forbidden under China’s broad state secrets laws to disclose information about its clients.
But on Monday the SEC and Deloitte filed a joint motion with the US District Court in Washington to dismiss the subpoena action.
It said it had recently received “a substantial volume of documents called for by its subpoena,” including Deloitte China audit work papers and other documents related to Longtop.
“The production was made by the China Securities Regulatory Commission in response to the SEC’s request for assistance in August 2012. The CSRC produced the documents” after obtaining them from Deloitte China, it said.
The SEC had sought the information for its investigation into Longtop, a business software firm that was based in the southeastern city of Xiamen but registered in the Cayman Islands.
The SEC halted trading of Longtop’s shares on the New York Stock Exchange in May 2011 after Deloitte abruptly quit as the company’s auditor, accusing Longtop managers of falsifying records about the firm’s cash balances and sales.
In the dispute, Deloitte had faced the possibility of censure or even being banned from practicing before the SEC – restricting access to lucrative US public company contracts.
The case highlighted the strains between the two regulators over the supervision of accountants working in both countries, and the oversight of companies from one country that are traded publicly on an exchange in the other.
Last Friday an SEC administrative judge ordered the Chinese units of the “Big Four” global accountancies suspended from auditing US-traded companies for six months, saying they “willfully violated” US laws by not assisting its investigations into Chinese companies trading on US markets.
That move could temporarily leave more than 100 Chinese companies quoted on US markets without an auditor and unable to trade.
The ruling did not take effect immediately and the companies plan to launch an appeal with the SEC.
The CSRC expressed “profound regret” over the SEC decision on Friday.
“This ruling does not take into account Chinese efforts to hand over audit documents,” spokesman Deng Ge said.