SEC sanctions lazy audit effort

The Chinese division of accounting giant Deloitte LLP allowed clients to do some of their own audit work, according to the U.S. Securities and Exchange Commission (SEC).

The SEC charged the Chinese affiliate of Deloitte with violating U.S. audit requirements in both its audits of foreign companies and its contributions to audits of U.S. issuers.

Specifically, the SEC found that “Deloitte-China personnel asked clients to select their own samples for testing and to prepare audit documentation purporting to show that Deloitte-China had obtained and assessed the supporting evidence for certain clients’ accounting entries.”

The SEC said these actions “created the appearance” that the auditors had tested their clients’ internal controls and financial statements, “when there was no evidence in the audit file that [they] had in fact done so.”

Deloitte-China agreed to settle the charges by paying a US$20-million penalty and agreeing to undertake extensive remedial measures, including an independent review of its policies and procedures, addressing the deficiencies uncovered by that review, and requiring additional training for its audit personnel.

“This action involves audit failures at the most basic level,” said Gurbir Grewal, director of the SEC’s enforcement division, in a statement. “Across multiple years and audit engagements, Deloitte-China auditors failed to meet professional standards, exercise independence and fulfil their essential role as gatekeepers.”

“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,” he said. “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.”

Last week the Ontario Securities Commission announced it would launch a review of the major audit firms in Canada following recent misconduct, including cheating on ethics exams and falsifying the dates on audit papers.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.