Deloitte-China Ordered to Pay $20 Million SEC Fine

Deloitte-China agreed to pay a $20 million fine to settle charges with the U.S. Securities and Exchange Commission that the firm asked its clients to conduct their own audit work. (Tim Boyle/Getty Images)

The SEC has issued a $20 million fine against Deloitte-China, for failing to comply with U.S. audit requirements.

In a Sept. 29 announcement, the Securities and Exchange Commission (SEC) penalized Deloitte Touche Tohmatsu Certified Public Accountants LLP (Deloitte-China) for “failing to comply with fundamental U.S. auditing requirements in its component audits of U.S. issuers and its audits of foreign companies listed on U.S. exchanges.”

The announcement revealed that, “In the course of numerous audits, 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.”

SEC chair Gary Gensler said in a statement: “We find that Deloitte-China fell woefully short of professional auditing requirements in numerous component audits of the Chinese operations of U.S. issuers and audits of Chinese companies listed on U.S. exchanges. While the SEC’s action today does not imply a violation of the Holding Foreign Companies Accountable Act, the action does underscore the need for the Public Company Accounting Oversight Board to be able to inspect Chinese audit firms.”

In response, Deloitte-China agreed to pay the $20 million fine and to take extensive corrective measures.

Statement of Protocol Agreement

Public Company Accounting Oversight Board (PCAOB) staff arrived in Hong Kong to begin an audit inspection.

According to a Sept. 22 report by Reuters, sources familiar with the matter disclosed that the China Securities Regulatory Commission and the Ministry of Finance dispatched about 10 officials to Hong Kong to participate in the audit inspection, which began on Sept. 19. The sources further revealed that the officials would also be present to assist a team from the PCAOB, whose job is to interview and collect evidence with audit firm staff.

The accounting audit inspection of Chinese stock companies launched by the PCAOB in Hong Kong was carried out in accordance with the Statement of Protocol (SOP) agreement signed between China and the United States in August.

On Aug. 26, the China Securities Regulatory Commission and the Ministry of Finance officially announced the signing of the SOP agreement with the PCAOB and stated that cooperation in the oversight of PCAOB-registered public accounting firms in China and Hong Kong, as required by the agreement, would be launched in the near future.

Two weeks prior, on Aug. 12, five Chinese state-owned enterprises—PetroChina, Sinopec, China Life, Aluminum Corporation of China, and Shanghai Petrochemical—collectively announced their delisting from the New York Stock Exchange.

CCP Fears Financial Decoupling

Shi Shan, a U.S.-based Chinese current affairs expert on political and economic issues, believes that, since the United States has already taken actions to proactively decouple from China in the fields of science and technology, the Chinese Communist Party (CCP) is worried about a financial decoupling and has to make concessions.

Shi told The Epoch Times that the delisting of these five enterprises from the New York Stock Exchange was a desperate move by the CCP. It had to hide the fact that these enterprises are fully controlled by the CCP in order to evade the requirements of the Holding Foreign Companies Accountable Act (HFCAA).

In December 2020, the HFCAA was signed into law by U.S. President Donald Trump. Subsequently, the SEC issued detailed rules for the implementation of the act.

The most important HFCAA rules stipulate that the PCAOB must be allowed to inspect the audits of China-based, U.S.-listed firms, and these companies must declare that they are not owned or controlled by the Chinese regime.

Shi pointed out that in China’s so-called “three-year reform of state-owned enterprises,” the CCP helped state-owned enterprises become industry giants through state monopoly.

“Their goal is to participate in global competition and influence the global economy by manipulating the domestic market,” he said.

For nearly a decade, U.S. regulators have been demanding audit documents from U.S.-listed Chinese companies. But the CCP, citing national security concerns, refused to provide them and refused to allow U.S. regulators to inspect accounting firms, leading to a stalemate between the two sides.

Since March this year, Chinese concept stocks that did not meet the PCAOB audit requirements were placed on the pre-delisting list. Then in April, the CCP was forced to revise relevant regulations, so that the two countries could finally sign the SOP agreement.

According to Shi, the CCP had to make concessions out of fears that the United States would start financial decoupling from China, indicating that the CCP has fallen into a passive position in its confrontation with the United States.