China suspended the operations of Deloitte Touche Tohmatsu Ltd.’s Beijing office for three months and imposed an unprecedented fine over lapses in its auditing work of bad-debt manager China Huarong Asset Management Co.
After several on-site inspections, personnel interviews, a review of paperwork and a hearing, the Ministry of Finance found that Deloitte had “serious audit deficiencies” in its work with Huarong between 2014 and 2019, according to a statement. The firm was fined 212 million yuan (US$30.8 million or $41.4 million), or more than 25 times the combined fines the ministry meted to accounting firms during inspections last year.
The accounting firm failed to properly look into the status of Huarong’s underlying assets, ignored compliance approvals on major investments and failed to apply a sense of skepticism in its audit work on Huarong, the ministry said. Huarong had several internal and risk control failures and distorted its accounting which Deloitte missed, according to the statement.
The local unit, Deloitte Hua Yong, said in a statement Friday that there’s no suggestion by the ministry that its Beijing branch or any of its people have done anything unethical. “We have cooperated fully with the MOF throughout its inspection,” it added. “We respect and accept the MOF’s penalty decision. We regret that, in this matter, the MOF considers certain aspects of our work fell below the required auditing standards.”
Huarong roiled Asian credit markets in 2021 as it failed to release its annual report on time, eventually revealing a massive loss for 2020. It later received a US$6.6 billion government-orchestrated bailout.
The suspension and fine come as Chinese authorities, including the Ministry of Finance, have urged state-owned firms to stop using the four biggest international accounting firms as recently as January, people familiar with the matter told Bloomberg last month. China is seeking to rein in the influence of the US-linked global audit firms and ensure the nation’s data security, as well as to bolster the local accounting industry, the people said.
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In its statement, Deloitte Hua Yong also said it has received no information from Huarong that there is any intention to make any prior period restatement to the company’s historic consolidated financial statements. “No changes to the relevant audit reports have been found to be necessary,” it said.
This is the second large fine Deloitte’s China operations has received in the past year. In September, the affiliate agreed to pay the $20 million over US Securities and Exchange Commission allegations it broke auditing rules. The SEC said that in audits for 2016 to 2018, employees at the affiliate asked clients to select their own samples of financial statements for review and create documents showing the auditor had tested the statements when there wasn’t evidence it had.
Deloitte China didn’t admit or deny the SEC’s allegations and said in a statement that it self-reported “deficient procedures” and that the SEC acknowledged the firm’s cooperation and remedial efforts.
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Deloitte’s China clients include state-owned giants such as Industrial & Commercial Bank of China Ltd. and China United Network Communications Ltd. The firm has more than 20,000 professionals across 30 Chinese cities, which provide audit & assurance, consulting, financial advisory, risk advisory, business advisory and tax services, according to its website.
The Big Four firms earned a combined revenue of 20.6 billion yuan from all Chinese clients in 2021, according to Finance Ministry data. Deloitte’s revenue in China amounted to 4.2 billion yuan.
Huarong was one of four asset management companies created following the Asian financial crisis in the late 1990s to buy bad loans from China’s banks and provide a safeguard. But the company and its peers later expanded beyond their original mandates, creating a maze of subsidiaries to engage in other financial businesses and borrow billions from the bond market.
Huarong and seven of its subsidiaries were also fined 100,000 yuan each, according to the statement.