Home Business SEC Attorney Wavers Over Deloitte’s Chinese Audit Case

SEC Attorney Wavers Over Deloitte’s Chinese Audit Case

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The legal counsel of the Securities and Exchange Commission (SEC) wavered during a court hearing as the agency tried to convince the judge to order the Chinese affiliate of Deloitte Touche Tohmatsu CPA Ltd. to submit audit documents related to its investigation on potential securities fraud by several Chinese companies trading in the United States markets.

SEC Attorney Wavers Over Deloitte's Chinese Audit Case

According to the report from Reuters, SEC attorney David Mendel came to court unprepared as he was unable to answer some of the questions of Magistrate Judge Deborah Robinsons such as  to which federal rules the SEC used in serving its subpoena in May 2011 to the legal counsels of Deloitte who are based in the United States.

During the hearing, Judge Robinson told attorney Mendel, “I am going to suggest you review the rules so you can answer my questions more specifically.” After the judge statement, Mendel’s colleague ran out of the courtroom with a cellphone and a notepad before consulting with him. Mendel paused to answer several other follow-up questions during the hearing. His performance raises questions whether the securities regulators are capable in handling delicate and complex legal issues involving Chinese companies.

Judge Robinson’s questions during the hearing concentrated on the technicalities of the case. She was trying to find out whether the SEC implemented  the proper process in serving the subpoena to Delloite.

Mendel argued the Deloitte are “on the hook to provide the documents requested,” Mr. Mendel told the judge. If they don’t comply with the rules, they’re subject to sanctions.”

On the other hand, Miles Ruthberg, the legal counsel representing Deloitte argued that it cannot submit any audit documents to the SEC because it is a violation of the Chinese secrecy law. He said, “It would violate Chinese law and it would expose Deloitte Touche Tohmatsu Cpa to severe sanctions, including the possible imprisonment of its partners.”

Last December, the SEC filed administrative proceedings against the Chinese units of Deloitte and other top accounting firms including Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), PricewaterhouseCoopers Zhong Tian CPAs Limited, and BDO China Dahua Co. Ltd after refusing to provide audit documents related to its fraud investigation. The agency cited that refusal to provide audit-related documents is a serious violation of the Securities Exchange Act and the Sarbanes-Oxley Act.

The SEC tried to reach an agreement with Chinese regulators to resolve the problems preventing access to audit documents related its fraud investigation. However, negotiations regarding the issue failed. According to the securities regulators, failure to resolve the issue could lead authorities to de-register or de-list the Chinese affiliate auditors of the big accounting firms.

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