The U.S. Securities and Exchange Commission has launched an enforcement action against Shanghai-based Deloitte Touche Tohmatsu CPA Ltd., the China member of Big Four audit firm Deloitte Touche Tohmatsu Limited, for its refusal to provide the agency with audit work papers related to a China-based company under investigation for potential accounting fraud against U.S. investors.

In a statement, Deloitte argues that Chinese law prevents it from disclosing information about its client.

"Deloitte Shanghai is caught in the middle of conflicting laws of two different governments," Deloitte Shanghai said. "Accounting firms in China are not permitted to produce documents directly to any foreign regulator without Chinese government approval."

Setting a precedent 

This is the first time the commission has brought an enforcement action against a foreign audit firm for failing to comply with a request under Section 106 of the Sarbanes-Oxley Act. 

The SEC’s Enforcement Division alleges that D&T Shanghai willfully violated the Sarbanes-Oxley Act and the Securities Exchange Act of 1934 by failing to provide the SEC with the audit work papers related to its engagement with its long-time client, US-listed Longtop Financial Technologies, which the SEC has been investigating for fraud.

“As a voluntarily registered U.S. public accounting firm, D&T Shanghai cannot benefit from the financial and reputational rewards that come with auditing U.S. issuers without also meeting its U.S. legal obligations,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Foreign firms auditing U.S. issuers should not be permitted to shield themselves from regulatory scrutiny to the detriment of U.S. investors.”

Scott Friestad, Associate Director of the SEC’s Division of Enforcement, added, “Without access to work papers of foreign public accounting firms, our investigators are unable to test the quality of the underlying audits and fulfill our responsibilities to investors.”

In a separate matter last year, the SEC filed a subpoena enforcement action against D&T Shanghai in federal court after the firm failed to produce documents in response to a subpoena related to an SEC investigation into possible fraud by Longtop Financial Technologies Limited. The SEC later filed charges against Longtop for alleged reporting failures.

According to the SEC’s order in this latest enforcement action, D&T Shanghai is a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB). In April 2010, SEC staff began seeking D&T Shanghai’s audit work papers related to its independent audit work for the client involved in an SEC investigation.

The SEC served Deloitte LLP, the U.S. member firm, with a subpoena requesting various related documents. Counsel for Deloitte LLP informed the staff that the U.S. firm did not perform any audit work for the client and therefore did not possess the documents related to the subpoena.

Click here to download the text of the US SEC's administrative proceedings against Deloitte Shanghai.