On May 9, the SEC brought an administrative proceeding under Rule 102(e) of the Commission's Rules of Practice against against Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. over the firm's refusal to produce audit work papers related to one of its clients. The case represents the first time the SEC has ever brought an enforcement action against a foreign audit firm for failing to comply with a request by the agency under Section 106 of the Sarbanes-Oxley Act. “Foreign firms auditing U.S. issuers should not be permitted to shield themselves from regulatory scrutiny to the detriment of U.S. investors,” said Robert Khuzami, Director of the SEC's Division of Enforcement.

The SEC alleges that D&T Shanghai will not produce the relevant audit work papers "because of its interpretation that it is prevented from doing so by Chinese law." The SEC, however, claims that this refusal violates the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide audit work papers concerning U.S. issuers to the SEC upon request. The SEC asserted in its administrative proceeding that since June 2010 it has also tried to obtain the relevant audit work papers through "international sharing mechanisms, however, these efforts have been unsuccessful."

The SEC filed a separate action to enforce a subpoena against D&T Shanghai in federal court last year after a similar dispute in which D&T Shanghai failed to produce documents in response to an SEC subpoena related to its client, Longtop Financial Technologies Limited. In that case D&T Shanghai similarly stated that producing the documents might violate Chinese law and subject the firm to severe sanctions including dissolution of the firm and life prison sentences for any of its partners and employees who are involved.

In a statement about this week's administrative proceeding, Deloitte again argued that under the law of China and specific directives issued by the China Securities Regulatory Commission, "accounting firms in China are not permitted to produce documents directly to any foreign regulator without Chinese government approval."  The firm added that 

Deloitte Shanghai is caught in the middle of conflicting laws of two different governments.... This is a profession-wide issue and not one that is specific to Deloitte Shanghai. Because the China legal impediments apply to all accounting firms in China, if a diplomatic resolution is not reached, it is likely that all of the major accounting firms in China will find themselves having to choose between violating their own national laws or facing a similar 102(e) proceeding by the SEC.

Topics