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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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