SEC fines Chinese firm Deloitte $20 million for letting clients do own audit work

NEW YORK The U.S. Securities and Exchange Commission fined a Chinese subsidiary of Deloitte, one of the Big Four accounting firms, $20 million for letting some clients, including foreign companies listed on U.S. exchanges, conduct their own audit work.

Over the past several years, Deloitte's Chinese affiliate asked some clients to select their own samples for testing and prepare documentation that appeared to be that Deloitte-China had tested the clients' financial statements and internal controls when there was no evidence that it had done so, the SEC said.

The auditors are the key gatekeepers in the financial markets, with issuers and investors relying on them to critically examine issuers' financial statements, identify any material misstatements and sign off on them when they are free of material errors.

"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 Gary Gensler, SEC Chair.

Investors in the U.S. should have trust in a company's financial numbers regardless of whether an issuer is foreign or domestic. Gensler said that the SEC's enforcement action underscores the need for the Public Company Accounting Oversight Board PCAOB to be able to inspect Chinese audit firms.

The PCAOB inspections help identify weaknesses in firms' quality control processes, which were at the center of the SEC enforcement action against Deloitte-China.

A China-U. A S. agreement last month allows U.S. regulators to inspect China-based accounting firms that audit New York-listed companies, easing an audit dispute that threatened to boot more than 200 Chinese companies from U.S. exchanges.

A SEC official said that Deloitte self-reported the violations at its China affiliate to the PCAOB in 2019 after learning of them.