Kelon scandal puts Deloitte in legal firing line

Accountant faces regulatory penalty and shareholder lawsuit

Deloitte Touche Tohmatsu faces being punished by the China Securities Regulatory Commission and sued by a minority shareholder in two landmark actions over its dealings with scandal-ridden Guangdong Kelon Electrical Holdings.

It would be the first time the mainland regulator has penalised an international company, according to Shanghai-based lawyer Yan Yiming, while the shareholder lawsuit will mark the first time one of the Big Four accounting firms has been sued over business matters in China.

'This is unprecedented. It shows the law in China is getting more in line with international standards. It will improve corporate governance and professional liability in China,' said Andrew Lam Ping-cheung, a Hong Kong lawyer.

The commission will hold a hearing in Beijing to determine whether Deloitte should bear legal responsibility for alleged fraud and embezzlement at Hong Kong and Shenzhen-listed Kelon, according to mainland reports.

Deloitte was the auditor of Kelon, one of China's biggest makers of refrigerators and air-conditioners, for three years before resigning last year after qualifying Kelon's 2004 results.

This year, subsidiaries of Kelon sued its former chairman, Gu Chujun, his firms and associates, for 331.6 million yuan for allegedly embezzling company funds. Gu was arrested in China in September last year for alleged economic crimes.

If the commission determines that Deloitte should bear responsibility, it could fine the company and possibly bar it from auditing mainland firms for a period of time, said Mr Yan, who has campaigned on behalf of Kelon shareholders.

'Many people believe the CSRC will find Deloitte responsible. If an auditor discovered fraud in a company but did not disclose it, that would violate Chinese law,' said Mr Yan.

'If the auditor is punished with the listed company for fraud, it will improve corporate governance and instil a greater sense of responsibility among other auditors.'

A Deloitte spokesman declined to comment.

The lawsuit from the shareholder - who has 200 Kelon shares - was filed on Wednesday at the Huangpu District Court in Shanghai. It accuses Deloitte of neglecting its duty as an auditor, according to mainland reports.

Under Chinese law, the court can accept the lawsuit only after the commission has delivered its verdict on Kelon, Mr Yan said. 'If the CSRC does not punish Deloitte, it will be difficult, but not impossible, for the lawsuit to succeed.'