(ATF) A Hong Kong regulator has called on Deloitte China - the local affiliate of one of the world's biggest accounting firms - to ensure an independent internal investigation is conducted after an employee anonymously alleged auditing violations of US-listed companies.
The Financial Reporting Council call follows China's Ministry of Finance summoning Deloitte executives after an employee at the firm emailed a 55-page PowerPoint presentation to every co-worker alleging auditing violations in China, citing incidents involving New York-listed companies.
The presentation, which circulated on social media, cites incidents between 2016 and 2017 involving 10 clients, including RYB Education, a kindergarten operator that was the subject of a child abuse probe by Beijing authorities. Other companies mentioned include China Boqi Environmental Holding and state-owned logistics giant Sinotrans.
The FRC, the territory's auditing regulator, said late on February 11 that it had met Deloitte China to understand the background to the allegations and the firm’s proposed response.
"The FRC communicated its expectation that the firm’s handling of the allegations must be robust to instil public confidence that all allegations are being investigated independently, will be reported back to the FRC and any findings will be addressed to our satisfaction."
The ministry in Beijing said on February 10 in a notice on its website that it takes the allegations very seriously and immediately called a meeting with Deloitte's leadership.
"The Ministry of Finance attaches great importance to the reporting of employees of Deloitte Touche Tohmatsu CPAs, and immediately interviewed the main person in charge of the firm to understand the relevant situation and required the firm to conduct a serious self-examination," the ministry said in its notice.
The notice said the ministry would cooperate with other regulatory authorities to carry out an inspection on the firm's audit reporting.
The latest allegations are likely to inflame US-China relations over a spate of fraudulent Chinese companies listed in New York. China has long refused to allow US regulators such as the Public Company Accounting Oversight Board to examine audits of US-listed Chinese companies without approval from the China Banking and Securities Regulatory Commission and other authorities.
"Positions taken by Chinese authorities impede our ability to oversee PCAOB-registered audit firms in mainland China and Hong Kong," William Duhnke, the board's chairman, said.
"Specifically, these positions impair our ability to conduct inspections and investigations of the audits of public companies with China-based operations and whether we will obtain access remains an open issue," he added. "This affects our ability to oversee ... audit work on behalf of investors in US capital markets."
CLAIMS TO BE INVESTIGATED
In December, former president Donald Trump signed legislation that could remove Chinese companies from US exchanges unless American regulators can review financial audits.
Deloitte acknowledged the investigation, saying it had been made aware of allegations circulating on social media "concerning certain historical 2016 and 2017 audits" conducted by Deloitte in Beijing.
"In fact, many of these allegations were previously reported by a member of our staff through the firm's own internal channels and subject of investigative procedures," the firm said, adding that "audit quality is our top priority and the foundation of our business".
"Nothing has been found to call into question the sufficiency of our audit evidence supporting our reports. Any further allegations of which we are made aware will be investigated. We reserve our legal rights to take action against dissemination of false information concerning Deloitte with laws and regulations."
The Ministry of Finance said it has made audit quality a priority this year.
"In 2021, we will rectify outstanding problems in the accounting sector enforce strict law enforcement and strict supervision, and effectively improve the quality of practice in the CPA industry and safeguard the interests of investors and the public," it said.
The ministry said it plans to work together with other authorities to investigate the allegations, adding that an approach of "zero tolerance" would be adopted and "violations will be dealt with in accordance with the law".