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May 24, 2011

Deloitte quits as Longtop auditor

Deloitte LongtopDeloitte has resigned
as auditor of US-listed Chinese software company Longtop Financial
Technologies after discovering falsified financial records,
including sales revenue, cash at bank and loan balances.

Deloitte resigned on Sunday and said its
previous Longtop audit reports should not be relied upon as well as
any Longtop financial communications in 2010 and 2011.

Deloitte said in its resignation letter that
it found falsehoods in the company’s financial statements and
experienced “deliberate interference by certain members of Longtop
management” in the audit process, including “unlawful detention” of
audit files.

Longtop chief financial officer Derek
Palaschuk resigned on 19 May and the US Securities and Exchange
Commission launched an enquiry into claims raised by Deloitte.

In a  statement Deloitte said that
Deloitte China identified a number of serious defects, including
false financial records and interference by certain members of
management with its audit process. “Deloitte China believed those
recent developments undermined its ability to rely on management
representations, an essential element of the audit process,”
Deloitte said

Longtop’s trading was suspended in New York on
17 May and the company has delayed filing its annual
report. 

Longtop raised $210 million in October 2007
and shares hit a high of $42.73 last November. They are said to
have declined 56 percent since, cutting the company’s market value
by more than $1 billion, following allegations by Citron Research
and OLP Global that Longtop inflated margins by hiding expenses and
underpaying employee benefits through a related-party staffing
firm.

Under the spotlight

The company is the latest in a series of
Chinese companies listed in the US which have seen extended trading
halts due to alleged financial irregularities. 

The SEC revoked the registrations of eight
China-based companies since December and more than 24 firms have
disclosed auditor resignations or accounting problems to the SEC
since March. Longtop said it will co-operate with the SEC’s
inquiry and conduct its own probe into Deloitte’s claims.

Citron previously aired allegations made
by Palaschuk that Deloitte was “very close, third only to his
relationship to his family and the CEO”. However, there is no
suggestion Deloitte acted unethically and the
firm could not be reached for comment at the time this article
went to print.

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