Deloitte's member firm in China agreed to pay a $20 million penalty to settle charges with the Securities and Exchange Commission that the firm asked its audit clients to do their own auditing work.
The SEC found that during 12 audits over several years, Deloitte Hua Yong asked its clients to select their own samples for testing and to prepare audit documentation purporting to show the Shanghai-based firm had received and assessed the supporting evidence for its clients' accounting entries. That created the appearance that the firm had done the required testing of its clients' financial statements and internal controls, but there was no evidence in the audit file that it had in fact done so.
"We find that Deloitte-China fell woefully short of professional auditing requirements in numerous component audits of Chinese operations of U.S. issuers and audits of Chinese companies listed on U.S. exchanges," said SEC Chair Gary Gensler in a statement Thursday. "These basic, foundational auditing requirements are necessary to instill trust in our capital markets. 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."
The SEC has been cracking down on auditing firms in China that don't allow inspections by the Public Company Accounting Oversight Board, threatening to delist companies whose shares trade on U.S. exchanges if they don't allow their audits to be examined for three years in a row, in keeping with the Holding Foreign Companies Accountable Act, which Congress passed in 2020. The PCAOB recently struck a preliminary agreement with China to allow PCAOB inspectors to visit Hong Kong after trying for years to get access to auditing firms there and on the mainland (
"While the SEC's action today does not implicate a violation of the Holding Foreign Companies Accountable Act, the action does underscore the need for the Public Company Accounting Oversight Board (PCAOB) to be able to inspect Chinese audit firms," Gensler added in a statement. "A fundamental goal of the PCAOB's inspection regime is to identify weaknesses in the firms' quality control processes — the very weaknesses at issue in this case."
Deloitte's affiliated firm in China confirmed the settlement. "Deloitte Hua Yong has agreed to a settlement with the U.S. SEC, including the payment of a settlement sum, bringing closure to a self-reported matter relating to certain deficient procedures identified in 12 PCAOB audits (nine component audits and three foreign private issuer audits)," said a statement from Deloitte-China emailed to Accounting Today. "In reaching this settlement, the SEC has acknowledged the firm's cooperation and remedial efforts."
The SEC found the misconduct involved both junior and senior audit team members and reflected a lack of audit supervision by audit partners. The order from the SEC found that Deloitte-China failed to adhere to numerous PCAOB auditing standards, including due professional care of audit evidence, sampling, documentation, internal control over financial reporting, audit supervision and quality control.
"This action involves audit failures at the most basic level. Across multiple years and audit engagements, Deloitte-China auditors failed to meet professional standards, exercise independence and fulfill their essential role as gatekeepers," said Gurbir S. Grewal, director of the SEC's Enforcement Division, in a statement. "Auditors are vital to the success of our financial markets and the standards they must abide by are neither optional, nor are they aspirational best practices. Rather, they're foundational to audit quality and investor protection, and every audit firm that conducts audits for issuers with securities trading on U.S. exchanges must meet them. Here, Deloitte-China audit professionals fell woefully short."
In addition to the financial penalty, the SEC order censures Deloitte-China and requires the firm to complete a review and assessment of its policies and procedures by an independent consultant retained by Deloitte Touche Tohmatsu Limited, a U.K.-based entity with which it is indirectly affiliated. The order further requires Deloitte-China to implement a plan to address deficiencies identified by the independent consultant that is approved and overseen by Deloitte-Global, and to subsequently undergo several additional annual reviews. The SEC's order also requires Deloitte-China to require additional training over three years for all of its audit professionals who serve U.S. public company audit clients.
