| July 31
July 31 A U.S. probe into the accounts of one of
China's largest private education providers is a fresh challenge
to its auditor Deloitte Touche Tohmatsu, which has run into more
problems with New York-listed Chinese clients than other Big
Four auditing firms.
The Securities and Exchange Commission (SEC) is
investigating New Oriental Education & Technology Group Inc
for possible accounting irregularities, the
Beijing-based firm said on July 17. Deloitte has audited New
Oriental since it went public in 2006.
Deloitte has been the slowest of the Big Four to expand in
China, missing out on many major state-owned firms as clients.
As a result, it has signed up more privately owned companies
looking to list in the United States where rules are more
flexible in allowing firms with a shorter operating track record
to go public.
"It's been my experience that Deloitte China's due
diligence, when it comes to taking on clients, is substantially
similar to that conducted by other major audit firms," said John
Huber, senior managing director at global business advisory firm
FTI Consulting and former head of the SEC's corporate finance
division. Huber has not been a Deloitte employee.
Nevertheless, auditing Chinese firms has been a
challenge for Deloitte. Since January last year, it has resigned
or has been dismissed from audit roles it held with seven
U.S.-listed Chinese companies, according to data from research
firm Audit Analytics.
In five of those instances, it was due to difficulty
verifying the accounts or alleged illegal behaviour by the
company. Reasons were not disclosed for the other two.
No evidence suggests any of Deloitte's departures involved
wrongdoing on its part.
PricewaterhouseCoopers has departed from five companies,
KPMG three, and Ernst & Young two, according to Audit Analytics.
"Experience shows that financial issues can arise at any
company whether large or small, listed or private," Deloitte
China said in a statement.
Deloitte has 44 U.S.-listed Chinese clients compared with
PwC which has 31, Ernst & Young 25 and KPMG 18, according to
data compiled last November by Paul Gillis, professor of
accounting at Peking University.
Deloitte's China roster includes Agricultural Bank of China
, the country's fourth-largest bank by
While all have had clients with accounting problems from
China, Deloitte holds the record of having had the most,
according to Muddy Waters, a research firm and short-seller.
"There are likely a number of problem audit clients at other
Big Four firms to be unearthed. However, Deloitte is leading the
pack in this measure," Muddy Waters wrote in its report on New
Deloitte China said its total portfolio of listed clients
contains many large and well-established companies.
"U.S.-listed Chinese companies facing issues represent just
a minuscule proportion of our total portfolio of listed
companies," the firm said.
Deloitte has yet to sign off on the accounts of New Oriental
for the year ended May 31, according to the company's chief
Since the firm said on July 17 it was being investigated,
around $1.6 billion has been wiped off New Oriental shares.
A day later, Muddy Waters said New Oriental had lied about
its network of schools and learning centres being company-owned,
alleging the numbers had been inflated.
Muddy Waters says it has seen contracts indicating New
Oriental operates some of its outlets via franchises.
New Oriental has denied the allegations from Muddy Waters,
which gained prominence last year from finding accounting
problems at Chinese firms and shorting their shares. The
short-seller has misinterpreted its financials, New Oriental
Deloitte has said it will cooperate with the SEC and
consider the appropriate and necessary response to the Muddy
The SEC has probed dozens of U.S.-listed Chinese companies
since the start of 2010.
Its inquiries have run into snags because of difficulties
getting documents from auditing firms, which say they could be
jailed for violating China's state secrets laws if they turn
over papers to the U.S. regulator.
In the first half of 2012 alone, 19 Chinese companies were
de-listed in the United States, either due to accounting and
regulatory problems or because of a slump in investor confidence
in China-based stocks.
One high-profile blow-up was Longtop Financial Technologies
Ltd, which Deloitte quit as the company's auditor.
Deloitte alleged the Chinese software company, which was
de-listed late last year, had tried to falsify its financial
statements and attempted to stop Deloitte staff from leaving the
company's premises when the discrepancies were uncovered.
Calls and emails to Longtop for comment went unanswered.
The SEC in September last year asked a federal court to
force Deloitte to produce records related to possible accounting
fraud at Longtop, but Deloitte has resisted, citing Chinese
secrecy laws. It was also charged in May for refusing to produce
documents from the audit of an unnamed China-based company.
Those charges were suspended on July 18 when the SEC said it
wanted to work on an alternative solution with Chinese
authorities to get access to documents.
Deloitte is the only member of the Big Four to have been
charged by the SEC in connection with its audits of allegedly
fraudulent Chinese companies.
Aside from Longtop, Deloitte was auditor on another Chinese
company that was thrown off U.S. exchanges last year -- China
Deloitte resigned as the company's auditor in March 2011,
having raised concerns as to the authenticity of its financial
statements. The company had earlier faced allegations from Muddy
Waters that it had inflated sales figures.
China MediaExpress has not filed financial results since
Deloitte's resignation and an investigation into the concerns
raised by the auditor is ongoing. The company did not reply to
emails and calls from Reuters for comment.
Deloitte also endured a tough year-end reporting season in
Hong Kong this year when it resigned from two mainland Chinese
companies -- Boshiwa International Holdings and Daqing
Dairy Holdings -- due to concerns about their
Boshiwa International's shares have not traded since
Deloitte's resignation in March.
A spokeswoman for the company referred to stock exchange
announcements from Boshiwa that it appointed a new auditor in
May, though it is yet to publish its annual accounts.
Daqing Dairy shares have also not traded since Deloitte's
resignation, and the company said it is still trying to hire a
new auditor. The company could not be reached for comment.