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Large Volume of Paperwork Slows Case against Deloitte Shanghai

November 5, 2013

The SEC has spent close to four months handling 20 cartons of documents from a Deloitte LLP affiliate in Shanghai. Regulators are investigating one of the firm’s former clients for accounting fraud and asked a court to issue a subpoena. More than two years into the investigation, SEC lawyers have to sort through the massive volume of paperwork before they can determine their next move against the audit firm and the former client.

As part of a high-profile court case with international implications, the SEC is reviewing 20 cartons of documents from the China Securities Regulatory Commission (CSRC) related to an investigation of a troubled Chinese company suspected of accounting fraud.

The regulatory agency told a U.S. federal judge November 4, 2013, that it’s “premature” to say how the paperwork will affect the agency’s enforcement action. The statement was issued in a report that enforcement officials submitted to the U.S. District Court for the District of Columbia jointly with Deloitte Touche Tohmatsu CPA LLP in Shanghai, the target of the agency’s request for a subpoena.

The SEC said it will update the court on its progress by December 16.

The paperwork originated with Deloitte Shanghai and work it did for a former client, Longtop Financial Technologies Ltd. In May 2011, the company’s CFO resigned, and Deloitte dropped it as a client because it no longer trusted the information it received from the company. The agency then sought to issue a subpoena to Deloitte Shanghai through the federal court in September 2011 when the audit firm said it couldn’t hand over the documents because it would violate Chinese regulations.

Chinese officials say releasing the audit documents to outsiders could expose state secrets.

The case changed direction in July 2013 when the CSRC said it would start releasing the paperwork to the SEC after it reviewed the documents.

After the SEC received the 20 boxes of documents, the agency’s enforcement attorneys informed the court that they would decide what to do about the subpoena request once the paperwork had been reviewed. District Court Judge Gladys Kessler on October 4 said “nothing has been filed” since July and asked for a status report from both the SEC and Deloitte.

The report said the SEC’s review of the production is ongoing and was complicated by a number of factors, including the lack of any sequencing numbers for the documents. The CSRC had requested that Deloitte produce hard copies of the papers, and the SEC staff had to scan them for loading into the SEC’s electronic database, a step that wasn’t completed until September.

“Based upon the SEC’s review to date, the production consists of a significant number of documents responsive to the SEC’s request for assistance to the CSRC, including… DTTC audit workpapers for Longtop,” the status report said. “These same documents are also responsive to the SEC’s May 27, 2011, subpoena directed to DTTC that is the subject of this action.”

However, the status report said that as the review has progressed, the SEC has raised a number of issues related to the production with Deloitte’s U.S. counsel, and those discussions are ongoing. Further, the SEC has raised certain issues related to the production with the CSRC and is waiting to hear back from the Chinese regulator as to how it may address those issues.

In light of those ongoing discussions, the SEC said it’s too early to advise the court how the paperwork will affect its case.

The status report didn’t indicate the nature of the discussions between the SEC and Deloitte Shanghai.