State Board Report

June 2012

The U.S. Securities and Exchange Commission brought an enforcement action against Deloitte Touche Tohmatsu CPA Ltd. (D&T Shanghai) on May 9, 2012, which was followed by Chinese regulators issuing rules that require the Chinese affiliates of the large international accounting firms to move control of those affiliates to partners who are Chinese citizens, as reported in the Wall Street Journal. This is the second time since last year that the SEC has taken enforcement action against the firm for refusing to turn over documents related to a Chinese company the SEC is investigating. Last time the action was connected to its investigation of Longtop Financial Technologies Ltd. and this time to a company identified only as “Client A.”

The SEC’s Division of Enforcement has asked that public administrative proceedings be instituted to determine if D&T Shanghai has willfully refused to comply with Section 106 of the Sarbanes-Oxley Act which directs a foreign public accounting firm that “issues an audit report, performs audit work or interim review” to “produce the audit work papers of the foreign public accounting firm and all other documents of the firm related to such audit work” to the Commission upon request.

Deloitte has maintained that Chinese law prohibits their handing over documents to a foreign regulator without the approval of the Chinese government. If found in violation of Section 106, it is possible that the U.S. Administrative Law Judge could censure D&T Shanghai or even bar them from auditing U.S.-traded companies. D&T Shanghai now audits more than 40 companies traded in the U.S.

Public Company Accounting Oversight Board Chairman James Doty has said that an agreement is close with the Chinese regulators to permit the PCAOB to observe audit inspections in China. He told Reuters this would be a first step toward joint inspections in China.

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