The Big 4, also known as the ‘Final 4’, are the four largest international accounting and professional services firms. The Big 4 audit the majority of all publicly-traded companies. PricewaterhouseCoopers, Ernst & Young, Deloitte Touche Tohmatsu and KPMG make up the Big Four. This is impressive, and we all admire these firms, but here at Lehman, Lee and Xu, we are working hard and doing our best to expand our “territory” and in effect we are growing rapidly, and our aim is to become the number one and though we are not an accounting firm we are already recognized as the third largest law firm in China. The only thing is that we are trying to provide with the best legal services in China without being bewitched by the Chinese system.
Deloitte in 2012 has resigned as auditor of Hong Kong-based maker of financial software, Longtop Financial Technologies, as US regulator, the Securities and Exchange Commission (SEC) began a probe into the company’s financial reports. Deloitte stated in its resignation letter on May 22 (2012) that it found falsehoods in the company’s financial statements and experienced ‘deliberate interference by certain members of Longtop management’ in the audit process.
Longtop said it is cooperating with the SEC’s inquiry as well as conducting its own investigation into Deloitte’s claims. Meanwhile, the SEC has reportedly widened its examination of accounting and disclosure issues related to Chinese companies to include those who used ‘reverse mergers’ in the US. (Another comment on this story:
http://www.bloomberg.com/news/2013-04-11/sec-asks-judge-to-allow-deloitte-subpoena-suit-to-proceed.html
).
On April 8, 2013, District Judge Shira Scheindlin (S.D.N.Y.) dismissed Deloitte Touche Tohmatsu CPA Ltd. (“Deloitte”) from a securities fraud class action brought by investors in Longtop Financial Technologies, Ltd. (“Longtop”), a Chinese company which was delisted from the NYSE in 2011. The plaintiffs alleged auditing giant Deloitte committed securities fraud by issuing unqualified audit opinions during a time when Longtop was engaged in pervasive accounting fraud. Deloitte approved Longtop’s financials even though it had identified risk factors within the company and was otherwise aware of “red flags” suggesting potential fraud.
In a 70-page opinion
found here
, Judge Scheindlin reiterated the high bar for pleading securities fraud against auditors. The court clarified that an auditor’s failure to uncover problems with a company’s internal controls and accounting practices does not constitute recklessness. To plead recklessness under the securities laws, a complaint must allege facts that approximate an
actual intent
to aid in the fraud perpetrated by the company, or that support an inference that the accounting practices were so deficient that the audit conducted amounted to no audit at all. The court found the theory of liability against Deloitte – that, in effect, it had identified risk factors at a company that was later discovered to have engaged in fraud – was “tainted by hindsight.” The court warned of the harmful policy implications for allowing fraud claims on that basis.
The decision, coming after two earlier attempts to have the case dismissed, is a big win for Deloitte – and will come in handy for other firms seeking to challenge claims of securities fraud related to the audits they conduct. The dismissal will also allow Deloitte to avoid some of the thorny discovery issues that arise when adversaries seek documents and workpapers from China.
This is the story, and as always when the story ends in a positive way, all is good, however this episode has a lot to teach us: first of all it must be underlined again that China is a world apart and sometimes the rules function differently though applied in the same manner. Let’s take this example. Basically a well known international accountancy firm tried to advise one of its client in the interest of the client, however in doing its work something went wrong. I do not intend to enter in the merit of the question, I am not writing my entry to judge the behavior of the protagonist of the story, what is important to note, at least in my view, is that when dealing with this world, i.e. China, everything here has to be interpreted and treated carefully. Our work here is to help business people in developing their activities in the best and more profitable way. However we have always to keep in mind and advise our client that China has its own characteristics. This is true in either sense, when we are counseling our foreign investors wishing to establish a presence in China and when we are advising Chinese entities on how to do business abroad trying to educate them about the characteristics of a foreign jurisdiction. Of course, the nature of a problem may vary greatly depending on the situation and on the people involved, however at the basis there is always a misunderstanding of the real intention of the entrepreneurs we have to assist or a misinterpretation of the rule we have to apply.
I am not sure I am saying things that make sense to you, the point is that when you are dealing with something you think to know is better to check what you are doing twice with another colleague and even with the entity you are advising because when you are immerse or in contact with the Chinese reality, you might be bewitched be this entrancing and intriguing Chinese environment.
Cristiano izzi