A US federal judge has allowed the US Securities and Exchange Commission (SEC) to continue its attempts to obtain audit documents from Deloitte China in connection to an alleged fraud investigation into Chinese company listed in the US, Longtop Financial Technologies.
The ruling by Magistrate judge Robinson means that the SEC can move forward with its attempt to force Deloitte China to comply with a subpoena related to a fraud investigation by Longtop.
After a string of accounting scandals involving Chinese companies listed on the US stock exchange in 2010 and 2011, the SEC sought to receive audit work papers in order to investigate potential accounting fraud against US investors but struggled as the auditors claimed the SEC’s requests conflict with Chinese secrecy laws.
While the SEC accused the firms of violating the SEC Act and the Sarbanes-Oxley Act that requires foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on US markets, the auditors saw themselves caught in the middle of a jurisdictional tug-of-war between the US and China.
With all of the Big Four involved, the regulator tried to reach a diplomatic solution to the wider problem of obtaining audit documents in China through negotiations with the China Securities Regulatory Commission.
Since the talks failed, the SEC triggered an administrative proceeding against all the Big Four in China and BDO China.