Deloitte has been caught up in a much larger issue regarding the role of Chinese accounting firms that review the financial statements of Chinese companies whose shares are traded in the United States, and whether those firms can be subjected to scrutiny by American regulators.
The S.E.C. began investigating Longtop Financial Technologies of China for accounting fraud earlier this year after Deloitte’s Chinese affiliate resigned as its auditor because of significant problems in verifying its financial statement. Deloitte had served as Longtop’s auditor since the company went public in the United States in 2007 through an initial public offering and listed its shares on the New York Stock Exchange.
Longtop sold more than $300 million in shares in the United States, and at its peak in November 2010 had a market value of $2.4 billion before its stock price collapsed with the disclosure of Deloitte’s resignation.
Deloitte gave Longtop’s financial statements a clean bill of health through 2010 and only withdrew its audit opinions in May when it resigned. In its letter to the company, Deloitte said it found “very serious defects” that included significant differences in deposit balances at banks from what the company reported and loans to it that had not been previously disclosed.
The first step in any corporate financial fraud investigation is to obtain the work papers of the auditors, so the S.E.C. issued a broad subpoena to Deloitte’s Chinese affiliate for those records within days of its resignation. The misconduct disclosed in the resignation letter raises questions not only about Longtop’s management but also how the outside auditors did not learn about it for so long. The S.E.C. is likely to look into whether anyone at Deloitte’s Chinese affiliate participated with management in the accounting problems that were eventually uncovered, and whether the firm was as thorough as it should have been in verifying the financial statements in prior years.
The firm has resisted complying with the subpoena because it asserted that turning over its work papers could violate Chinese law prohibiting the disclosure of “state secrets,” which it says includes information about the “national economy and social development.” Anyone convicted of a violation could be sentenced to a long prison term.
In September, the S.E.C. filed a subpoena enforcement action in Federal District Court in Washington to force Deloitte’s Chinese affiliate to turn over the documents from its Longtop audits. In a filing in the case earlier this month, the S.E.C. argued that it should be permitted to serve the subpoena on Deloitte’s American lawyers along with an order requiring the firm to respond to its demand for documents without having to use a more cumbersome treaty procedure that requires working through the Chinese government, which would add months to the process.
If the court orders the accounting firm to turn over the records and it refuses, then it can be held in contempt under 15 U.S.C. § 78u(c),which could result in a criminal misdemeanor conviction punishable by a fine.
The firm could also face suspension or revocation of its registration as an auditing firm in the United States by the Public Company Accounting Oversight Board if its refusal to turn over records violates the agency’s rules. A contempt finding by a federal court would not go over well with the regulator. Any disciplinary action could have a negative impact on other Chinese companies whose shares are traded in the United States and use Deloitte’s Chinese affiliate because they might have to switch auditors.
Earlier this week, the Public Company Accounting Oversight Board disclosed part of its 2007 annual review of Deloitte’s United States operation that highlighted deficiencies in its quality control. One issue raised in the report is the quality of the work of its foreign affiliates because it “has no formal system in place to monitor the services its foreign affiliates actually perform.”
When investors see a name like Deloitte as a company’s auditor, there is a level of comfort that the firm will apply the highest standards to its review of the financial statements. But the name may imply more than is actually there if a foreign company, or the overseas operations of a multinational corporation, is audited by an affiliate that may not adhere to American accounting standards. At the least in such cases, questions can be raised about whether a foreign affiliate’s work is of the same quality as that performed by Deloitte in the United States.
The issue of whether Chinese accounting firms meet the standards set in the United States is a growing concern. The S.E.C. has stopped the trading of a number of Chinese companies that issued shares in the United States by engaging in reverse mergers because of questions about the veracity of their financial statements. This move raises implications about the quality of the work performed by their outside auditors.BEIJING — A toddler who was run over by vans twice and then ignored by passersby on a busy market street died Friday — a week after the accident and after days of bitter soul-searching over declining morality in China.
Two-year-old Wang Yue died shortly after midnight of brain and organ failure, the Guangzhou Military District General Hospital said.
“Her injuries were too severe and the treatment had no effect,” intensive care unit director Su Lei told reporters.
The plight of the child, nicknamed Yueyue, came to symbolize what many Chinese see as a decay in public morals after heady decades of economic growth and rising prosperity.
Gruesome closed-circuit camera video of last Thursday’s accident, aired on television and posted on the Internet, showed Yueyue toddling along the hardware market street in the southern city of Foshan. A van strikes her, slows and then resumes driving, rolling its back right wheel over the child. As she lays with blood pooling, 18 people walk or cycle by and another van strikes her before a scrap picker scoops her up.
Yueyue’s death touched off another round of hand-wringing about society and personal responsibility. Many comments posted to social media sites said “we are all passersby.”
Li Xiangping, a professor of religion at Huadong University, said on a Twitter-like service that it is too easy to blame others.
“What after all prompted such a sad phenomenon? Officials? The rich? Or is it our own cold-heartedness?” Li said on Sina Corp.’s Weibo.
Police have detained the drivers of both vans on suspicion of causing a traffic accident but have not said what formal charges they would face — and if manslaughter could be the charge now that the girl has died.
The people who could be seen on the video passing by the injured Yueyue have recounted being harassed for ignoring her. The respected Southern Metropolis Daily newspaper quoted a man it identified only as Mr. Chen, a hardware merchant, saying that he had been receiving crank calls ever since someone picked him out as the 16th passerby. He said he hadn’t noticed the child.
Some experts said an unwillingness to help others is an outgrowth of urbanization as migrants pour into cities and create neighborhoods of strangers.
“Rapid urbanization not only affects China or Foshan, but anywhere in the world where you have a lot of high-rise buildings, where there is high population density, then the relationship with the neighbors, and with each other is affected,” said Yao Yue, a psychologist and director of telephone help-line for distressed people in Beijing.
passage of time
The S.E.C. began investigating Longtop Financial Technologies of China for accounting fraud earlier this year after Deloitte’s Chinese affiliate resigned as its auditor because of significant problems in verifying its financial statement. Deloitte had served as Longtop’s auditor since the company went public in the United States in 2007 through an initial public offering and listed its shares on the New York Stock Exchange.
Longtop sold more than $300 million in shares in the United States, and at its peak in November 2010 had a market value of $2.4 billion before its stock price collapsed with the disclosure of Deloitte’s resignation.
Deloitte gave Longtop’s financial statements a clean bill of health through 2010 and only withdrew its audit opinions in May when it resigned. In its letter to the company, Deloitte said it found “very serious defects” that included significant differences in deposit balances at banks from what the company reported and loans to it that had not been previously disclosed.
The first step in any corporate financial fraud investigation is to obtain the work papers of the auditors, so the S.E.C. issued a broad subpoena to Deloitte’s Chinese affiliate for those records within days of its resignation. The misconduct disclosed in the resignation letter raises questions not only about Longtop’s management but also how the outside auditors did not learn about it for so long. The S.E.C. is likely to look into whether anyone at Deloitte’s Chinese affiliate participated with management in the accounting problems that were eventually uncovered, and whether the firm was as thorough as it should have been in verifying the financial statements in prior years.
The firm has resisted complying with the subpoena because it asserted that turning over its work papers could violate Chinese law prohibiting the disclosure of “state secrets,” which it says includes information about the “national economy and social development.” Anyone convicted of a violation could be sentenced to a long prison term.
In September, the S.E.C. filed a subpoena enforcement action in Federal District Court in Washington to force Deloitte’s Chinese affiliate to turn over the documents from its Longtop audits. In a filing in the case earlier this month, the S.E.C. argued that it should be permitted to serve the subpoena on Deloitte’s American lawyers along with an order requiring the firm to respond to its demand for documents without having to use a more cumbersome treaty procedure that requires working through the Chinese government, which would add months to the process.
If the court orders the accounting firm to turn over the records and it refuses, then it can be held in contempt under 15 U.S.C. § 78u(c),which could result in a criminal misdemeanor conviction punishable by a fine.
The firm could also face suspension or revocation of its registration as an auditing firm in the United States by the Public Company Accounting Oversight Board if its refusal to turn over records violates the agency’s rules. A contempt finding by a federal court would not go over well with the regulator. Any disciplinary action could have a negative impact on other Chinese companies whose shares are traded in the United States and use Deloitte’s Chinese affiliate because they might have to switch auditors.
Earlier this week, the Public Company Accounting Oversight Board disclosed part of its 2007 annual review of Deloitte’s United States operation that highlighted deficiencies in its quality control. One issue raised in the report is the quality of the work of its foreign affiliates because it “has no formal system in place to monitor the services its foreign affiliates actually perform.”
When investors see a name like Deloitte as a company’s auditor, there is a level of comfort that the firm will apply the highest standards to its review of the financial statements. But the name may imply more than is actually there if a foreign company, or the overseas operations of a multinational corporation, is audited by an affiliate that may not adhere to American accounting standards. At the least in such cases, questions can be raised about whether a foreign affiliate’s work is of the same quality as that performed by Deloitte in the United States.
The issue of whether Chinese accounting firms meet the standards set in the United States is a growing concern. The S.E.C. has stopped the trading of a number of Chinese companies that issued shares in the United States by engaging in reverse mergers because of questions about the veracity of their financial statements. This move raises implications about the quality of the work performed by their outside auditors.BEIJING — A toddler who was run over by vans twice and then ignored by passersby on a busy market street died Friday — a week after the accident and after days of bitter soul-searching over declining morality in China.
Two-year-old Wang Yue died shortly after midnight of brain and organ failure, the Guangzhou Military District General Hospital said.
“Her injuries were too severe and the treatment had no effect,” intensive care unit director Su Lei told reporters.
The plight of the child, nicknamed Yueyue, came to symbolize what many Chinese see as a decay in public morals after heady decades of economic growth and rising prosperity.
Gruesome closed-circuit camera video of last Thursday’s accident, aired on television and posted on the Internet, showed Yueyue toddling along the hardware market street in the southern city of Foshan. A van strikes her, slows and then resumes driving, rolling its back right wheel over the child. As she lays with blood pooling, 18 people walk or cycle by and another van strikes her before a scrap picker scoops her up.
Yueyue’s death touched off another round of hand-wringing about society and personal responsibility. Many comments posted to social media sites said “we are all passersby.”
Li Xiangping, a professor of religion at Huadong University, said on a Twitter-like service that it is too easy to blame others.
“What after all prompted such a sad phenomenon? Officials? The rich? Or is it our own cold-heartedness?” Li said on Sina Corp.’s Weibo.
Police have detained the drivers of both vans on suspicion of causing a traffic accident but have not said what formal charges they would face — and if manslaughter could be the charge now that the girl has died.
The people who could be seen on the video passing by the injured Yueyue have recounted being harassed for ignoring her. The respected Southern Metropolis Daily newspaper quoted a man it identified only as Mr. Chen, a hardware merchant, saying that he had been receiving crank calls ever since someone picked him out as the 16th passerby. He said he hadn’t noticed the child.
Some experts said an unwillingness to help others is an outgrowth of urbanization as migrants pour into cities and create neighborhoods of strangers.
“Rapid urbanization not only affects China or Foshan, but anywhere in the world where you have a lot of high-rise buildings, where there is high population density, then the relationship with the neighbors, and with each other is affected,” said Yao Yue, a psychologist and director of telephone help-line for distressed people in Beijing.
passage of time
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