As part of a settlement with the US Securities and Exchange Commission (SEC) for audit failings that included urging clients to do their own audit work, the Chinese subsidiary of Big Four audit firm Deloitte agreed to pay a $20 million penalty and undertake substantial corrective steps.
Deloitte Touche Tohmatsu Certified Public Accountants (Deloitte China) audits Chinese companies that trade on US markets on behalf of the worldwide firm's US arm. Deloitte China is a member of the Public Company Accounting Oversight Board (PCAOB) and must follow its rules.
According to the SEC's order filed Thursday, Deloitte China invited its clients on multiple occasions to create paperwork that gave the appearance that Deloitte China had tested their financial statements and internal controls when "there was no evidence in the audit file that they had in fact done so."
According to the decision, Deloitte China audit employees were not adequately monitored and allowed customers to pick and choose which samples to submit for testing. According to the SEC, this increased the chance that clients would "strategically chose" samples, lowering the reliability of the tests.
According to the decision, Deloitte US relied on these inadequate component audits in issuing its audit opinions.
Deloitte China did not comply with professional auditing norms. The PCAOB and the SEC's Rules of Practice were violated, according to the agency.
“[B]asic, foundational auditing requirements are necessary to instill trust in our capital markets,” said SEC Chair Gary Gensler in a press release. “It’s a privilege for issuers to access our markets—the largest, deepest, most liquid markets in the world. Investors in U.S. markets should be protected—and have trust in a company’s financial numbers—regardless of whether an issuer is foreign or domestic.”
Gensler also emphasised the relevance of the Holding Foreign Companies Accountable Act and the PCAOB's ability to investigate China-based audit firms to discover flaws similar to those claimed at Deloitte China.
The SEC accepted Deloitte China's settlement offer in part because of the firm's "extensive" cooperation and corrective initiatives. According to the SEC, Deloitte China hired a third-party law firm to conduct an investigation as soon as it became aware of the alleged misconduct and informed the PCAOB of the activities.
Deloitte China consented to an independent assessment of its policies and procedures, which would be overseen by Deloitte Global, in order to assure compliance with PCAOB auditing requirements. According to the SEC, Deloitte China will implement any suggestions resulting from the review. Deloitte China's CEO will verify to the worldwide office that the suggestions have been adopted.
Deloitte China also agreed to three years of annual assessments by Deloitte's worldwide office.
For the next three years, all Deloitte China auditing professionals with US clients must complete at least 16 hours of training per year. Each year, supervisors must undergo at least 24 hours of training.
Deloitte China neither admitted nor denied the SEC's conclusions. The firm consented to be censured in addition to paying the fine.
Deloitte US did not reply quickly to a request for comment.
By fLEXI tEAM