By John McCrank
NEW YORK (Reuters) - The U.S. Securities and Exchange Commission on Thursday fined the Chinese affiliate 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 multiple years, Deloitte's Chinese affiliate asked some clients to select their own samples for testing and to prepare documentation that gave the appearance that Deloitte-China had tested the clients' financial statements and internal controls, when there was no evidence it had in fact done so, the SEC said.
Auditors are essential gatekeepers in the financial markets, with both issuers and investors relying on them to critically and independently examine issuers' financial statements, identify any material misstatements in them, 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 SEC Chair Gary Gensler.
"Investors in U.S. markets should be protected — and have trust in a company's financial numbers — regardless of whether an issuer is foreign or domestic."
The SEC's enforcement action underscores the need for the Public Company Accounting Oversight Board (PCAOB) to be able to inspect Chinese audit firms, Gensler said.
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.S. agreement last month allows U.S. regulators, for the first time, 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.
Deloitte self-reported the violations at its China affiliate to the PCAOB in 2019 upon learning of them, an SEC official said.
(Reporting by John McCrank; Editing by Chizu Nomiyama)