Deloitte: Regulators at fault in China audit problems

The battle between U.S. regulators and the Chinese units of big accounting firms took a nasty turn last month, when the SEC formally charged the China affiliates of Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young.

The PCAOB and SEC had been seeking information related to the audits of imploded reverse mergers involving Chinese companies. The SEC's suit was somewhat of a surprise, as some government officials had been upbeat about the possibility of some sort of détente on this contentious issue. The month before, the PCAOB chairman was publically stating that he was hopeful for some sort of breakthrough. It's unclear what prompted the SEC to get more aggressive.

In any case, Deloitte has filed an interesting court document that makes an interesting accusation: "The SEC has long been aware that the CSRC (China Securities Regulatory Commission) forbids China-based audit firms to produce audit work papers directly to the SEC, and yet the SEC chose to allow China-based companies to sell securities in the United States despite those restrictions."

The audit firm is essentially saying the SEC made its own bed, and must lie in it. The reality is that we're no closer to a resolution. As the legal skirmishing proceeds, the fact remains that the PCAOB and SEC cannot properly investigate companies that list on U.S. exchanges. It will take a long time for the SEC's latest suit China affiliates to work its way through the court system.

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