The Securities and Exchange Commission has charged Deloitte Touche Tohmatsu Certified Public Accountants LLP (Deloitte-China), the Chinese affiliate of the Deloitte global network of accounting firms, with a $20m penalty for failing to comply with fundamental US auditing requirements in both its component audits of US issuers and its audits of foreign companies listed on US exchanges.

The SEC order found that, during multiple years with numerous audits, Deloitte-China personnel had asked certain clients to provide their own samples to be tested, including preparing the audit documentation which claimed that Deloitte-China had acquired and evaluated the supporting evidence for those clients’ accounting entries.

“We find that Deloitte-China fell woefully short of professional auditing requirements in numerous component audits of Chinese operations of US issuers and audits of Chinese companies listed on US exchanges,” said SEC Chair Gary Gensler. “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 US markets should be protected, and have trust in a company’s financial numbers — regardless of whether an issuer is foreign or domestic.”

The order also stated that the misconduct involved both junior and senior audit team members and reflected a lack of audit supervision by audit partners, and that Deloitte-China failed to adhere to numerous Public Company Accounting Oversight Board (PCAOB) auditing standards.

“Accounting firms are critical gatekeepers of our disclosure program and when they abdicate their responsibilities as independent auditors it threatens the health of our US financial markets,” said Melissa R. Hodgman, Associate Director of the SEC’s Enforcement Division. “The Division of Enforcement will aggressively pursue all PCAOB-registered accounting firms that fail to truthfully perform their roles.”

Take substantial preventive measures

Deloitte-China has agreed to settle the charges by paying a $20m penalty and is agreeing to take substantial preventive measures into hand.

“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 PCAOB to be able to inspect Chinese audit firms,” Chair Gensler added. “A fundamental goal of the PCAOB’s inspection regime is to identify weaknesses in the firm’s quality control processes — the very weaknesses at issue in this case.”

In addition to the $20m penalty, the SEC’s order censures Deloitte-China and requires the company to review and complete an assessment of its policies and procedures by an independent consultant retained by Deloitte Touche Tohmatsu Limited (“Deloitte-Global”), a UK entity with which it is indirectly affiliated.

Furthermore, the order requires Deloitte-China to implement a plan to address its insufficiencies, which will be identified by the consultant. Deloitte-China will also have to subsequently undergo several additional annual reviews. All of its audit professionals who serve US public company audit clients are required to undertake additional training over three years.