Deloitte loses in federal court | China Accounting Blog | Paul Gillis

Deloitte loses in federal court

A U.S. District Court judge has lifted the stay on the enforcement of the SEC’s subpoena of Deloitte’s working papers on Longtop Financial Technologies. The SEC had asked for the stay last July so that it could attempt to negotiate access to the working papers with Chinese regulators. The SEC gave up on that in December and asked the judge to lift the stay. Deloitte protested, pointing out it was already in the dock with the rest of the Big Four and BDO over the same issue and it was unfair to single them out for early punishment.

Unsurprisingly, the judge was unimpressed by Deloitte’s arguments and has lifted the stay. Now the SEC and Deloitte will be back in court on May 1 to argue whether the subpoena should be enforced. If that goes badly for Deloitte they will be ordered to cough up the working papers, and when they inevitably refuse to do that (since China has told them doing so would land them in jail), they will be back in court again talking about what penalty should be imposed for contempt of court. I expect that they get banned from auditing U.S. listed Chinese companies, but not the Chinese operations of their MNC clients like General Motors and Microsoft. But Deloitte inevitably appeals...

I am thinking the best chance for resolution of this issue will come at the fifth round of the Strategic and Economic Dialogue (SED) between the U.S. and China that will take place in Washington in early July. The issue has been on the agenda of that meeting twice in the past. First, in the third round held in Washington in 2011 the two countries agreed to make joint efforts to accelerate a resolution of the problem. In the fourth round, held in 2012 in Beijing, PCAOB chairman James Doty accompanied the U.S. delegation and held meetings on the sidelines. Maybe they can reach resolution in the heat and humidity of a Washington summer. I think the SED meeting in July may be the last chance to reach a deal before deregistration. Absent a deal, this uncertainty is going to drag on for a long time.

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