Deloitte-China Case ‘Not Alone’ Among International Financial Standards Violations in China: Experts

The U.S. Securities and Exchange Commission (SEC) fined Deloitte-China $20 million on Sept. 29 for its failure to comply with basic U.S. audit requirements. Experts say the incident highlights the need for better oversight of Chinese audit firms.

Deloitte-China, also known as Deloitte Hua Yong, is the Chinese affiliate of international accounting firm Deloitte Touche Tohmatsu.

Responding to the allegation the same day, Deloitte Hua Yong acknowledged on its official website that its audit failed to meet Public Company Accounting Oversight Board (PCAOB) auditing standards for fiscal year 2018. The firm said those audit procedures have been “re-performed and effectively remediated.”

“We find that Deloitte-China fell woefully short of professional auditing requirements in numerous component audits of Chinese operations of U.S. issuers and audits of Chinese companies listed on U.S. exchanges,” said SEC Chair Gary Gensler in a Sept. 29 press release confirming the $20 million settlement. “These basic, foundational auditing requirements are necessary to instill trust in our capital markets.”

“It’s a privilege for issuers to access our markets—the largest, deepest, most liquid markets in the world. Investors in U.S. markets should be protected—and have trust in a company’s financial numbers—regardless of whether an issuer is foreign or domestic,” Gensler said.

Gensler said the incident highlights the need for the PCAOB to inspect Chinese audit firms.

“Deloitte-China is not alone in this situation,” Katherine Jiang, a Hong Kong-based financial analyst, told The Epoch Times on Sept. 30. “If the SEC wants to investigate, it will find additional violations at other international financial institutions that provide financial services to China.

“State-owned enterprises or large private companies backed by the Chinese Communist Party (CCP), have basically lost Chinese traditional virtues that contain benevolence, justice, etiquette, wisdom, and trust,” Jiang said. CCP-backed companies often use local market strengths to coerce global financial service providers to reap financial interests rather than following “etiquette” and “trust,” Jiang added.

Workers produce shoes for a U.S. company at a state-owned factory in Shenyang, China, on May 31, 2000. (Goh Chai Hin/AFP via Getty Images)

International Financial Institutions Compromised

Jiang said it is difficult for foreign financial institutions to do business in China because “they have to satisfy their clients while finding ways to meet regulatory requirements at all levels.”

Western financial institutions doing business with China face unique challenges. Jiang explained that many Chinese companies are unaware that they fall short of global standards, and may not be professional enough to properly address their shortcomings. In addition, some companies have bad habits formed under CCP rules. That may include coercing financial institutions or making unreasonable demands, especially when those demands are backed by China’s State-owned Assets Supervision and Administration Commission.

Jiang cited her experience working with state-owned Chinese companies: when she questioned the veracity of data, the company blamed it on different statistical methods. One company even gave different data every time she asked the same question. As she continued to track down the answer, she was finally labeled as “not understanding China’s situation” and “not understanding how Chinese enterprises work.”

‘A Matter of Falsification’

“It’s not a matter of understanding or statistical methods, [it’s] a matter of falsification,” Jiang said.

Jiang warned the company of the dangers of falsifying data, “but they [state-owned enterprises] don’t care as the regulators won’t punish them; the state-owned assets supervisor supports them.”

“As a monopolist reaping the benefits of the masses in its domestic market, the CCP does not care about the opinions of the foreign financial industry,” Jiang said.

Deloitte Global is one of the world’s largest accounting firms, with 415,000 professionals worldwide. Brand Finance, a UK-based evaluation agency, has ranked Deloitte the most influential and “most valuable” business service brand in the world for four consecutive years.

Deloitte-China, like other large accounting firms, provides ethics training to its staff on a regular basis, but in the communist environment the training may be largely disregarded, said Jiang.  She believes that the CCP’s ruling environment is conducive to irregular financial operations.

‘Communist Rule Fosters Unregulated Financial System’

Jiang believes that as foreign financial institutions develop their businesses under the CCP’s rule, the corporate culture of their Chinese branches devolves, and ethical conflicts become common.

“Once [a business] doesn’t abide by basic ethics for the first time, it will get used to making compromises later,” Jiang said.

“Many Western veteran bankers or financial practitioners find that when their China business grows rapidly, the company culture deteriorates significantly, because there is always the dilemma of whether to do business or maintain ethical conduct.

“People who work in financial institutions are smart, but when dealing with Chinese companies, part of those smarts [are] used to keep Chinese clients happy while satisfying the superficial requirements of regulators, rather than actually following ethics,” Jiang said.

CCP’s Financial Data Counterfeiting

Falsehoods are common in Chinese official statistics. For example, on Aug. 18, the Ministry of Commerce released data claiming that China’s use of foreign capital in the first seven months of the year had achieved double-digit growth of 17.3 percent.

However, a Bloomberg report on Sept. 5 revealed this was a falsification of the CCP, reporting that Hong Kong was the source of as much as 76 percent of “actually utilized” foreign direct investment in China last year. This was most likely the result of mainland companies routing funds through Hong Kong in a process dubbed “round-tripping.”

In addition, the majority of the new investment flowed to the service industry, not the high-end manufacturing that the Chinese regime favors.

In an interview with The Epoch Times on March 26, Dr. Frank Tian Xie, a professor at the University of South Carolina’s Aiken School of Business, said many CCP officials, because of the regime’s preferential treatment for foreign funding, transfer money from the state treasury to overseas locations in various ways. That money then reenters the Chinese market as American or overseas capital, in a process that is, essentially, money laundering.

In light of this, the CCP’s official data is definitely distorted, Xie said.