“I like to watch.” Peter Sellers as Chance the gardener in “Being There”.
I’ve been watching the developments for a while now between the global audit firms, their clients, the regulators on both sides, and investors – especially the shorts – who have all been raising the issues of Chinese frauds. I’ve learned over the last six years that there’s no wine before its time. In other words, I can write about an issue but it has to bubble up via a lawsuit or an issue that hits US investors square in the face for major media to pay attention. And then major media drops the issue until there’s another trigger to force them to write about it again.
There’s nothing really new for me to write about either the SEC’s latest charges against the Chinese member firms of the four largest global audit firms and a fifth, BDO or the lawsuits and regulatory claims against Ernst & Young about one of the frauds, Sino-Forest. (Shareholder suit settled! For C$117 million! The largest settlement by an auditor in Canadian history!)
The big move had already been made by the SEC when it filed administrative complaints against one of them, Deloitte, over two cases. Then the SEC asked for a continuance on those proceedings to let the diplomatic activities between China and the US regulators play out. Monday’s actions by the SEC show that plan did not work out.
US regulators also punted in addressing the re-registration of the Chinese member firms with the PCAOB – China mandated ownership changes that require majority native ownership of the firms – and allowed KPMG to remain registered in spite of a significant re-configuration.
The PCAOB response to the SEC’s move…
In a statement, PCAOB Chairman James Doty said his agency’s negotiations are proceeding on a separate track from the SEC.
If the agency’s efforts do not lead to an agreement, “then we will need to consider other alternatives,” Doty said.
…adds no new concrete information about how this untenable situation can be resolved without also invalidating the audits of multinationals that have significant operations in China – and every other country the PCAOB still can’t inspect the audit firms – in the process.
It’s a mess.
Litigation by private plaintiffs will rumble on, with its inevitable ups and downs. The most recent dismissal, with leave to replead, of a case against Deloitte for Longtop, is an example. It’s not that there’s no case for Longtop against Deloitte. It’s just that those lawyers did not make a very good one. Law.com reports:
“No facts alleged show that [Deloitte Touche Tohmatsu CPA] was aware, or should have been aware, of wrongdoing on Longtop’s part at the time DTTC issued the audit reports,” Scheindlin ruled. “Instead, the allegations in the Complaint lead to the compelling and stronger inference that DTTC performed a diligent audit, only to be duped by Longtop’s fraud.”
Longtop and its Chinese executives have yet to file appearances in the case, and probably never will, making Deloitte the focal point of the case so far.
Deloitte has been punished – not nearly enough but they paid – for “no audit at all” in the case of Bear Stearns. And Steven Thomas is preparing to go to trial in June against Deloitte, having overcome Deloitte’s motions to dismiss, in the case of Taylor Bean and Whitaker.
Audit firms can be smacked for their sins. I urge the lawyers to take a clue from those two cases, great lawyers in both instances, and try again.
I’m afraid the SEC’s latest move, while dramatic, will be moot. The major advantage to Chinese firms of raising money from US investors, and a major advantage of multinationals doing business in China, is that US regulations and law enforcement can’t touch them. It’s written all over the public offerings and it’s written all over the joint venture agreements.
The SEC can watch but they can’t touch. And the global audit firms are laughing, still, all the way to the bank.
I’ve written quite a bit about these issue. If you’re playing catch up, this list of posts is a good place to start.
Chinese Reverse Merger Companies – The Auditor Angle, Forbes, March 15, 2011
Continued at re: The Auditors with more details.
Australian Radio Quotes McKenna: “Background Briefing” on ABC, August 17, 2011
File Under Regulatory Capture – Deloitte’s Fireside Chats, Forbes, August 22, 2011
Deloitte Hides From SEC Behind Chinese Wall For Longtop, Forbes, September 9, 2011
A Case of Regulator Capture and Why The SEC Won’t Push Deloitte To The Limit, re: The Auditors,
September 11, 2011
Auditors In China: A Whole Lot Of Posturing Going On, Forbes, October 21, 2011
What The SEC and PCAOB Still Don’t Admit About Chinese Frauds, Forbes, July 9, 2012
Continued at re: The Auditors with more details.
Why Is The SEC Pursuing Deloitte Shanghai? Looks Personal, re: The Auditors, May 10, 2012
Casino Industry Suffering From China Denial Syndrome, re: The Auditors, October 8, 2012