Thu. Mar 4th, 2021

Regulation HK

Financial Regulator

China Instructs Deloitte to Investigate Alleged Auditing Violations

2 min read

Auditing violations alleged by a whistleblower include improper conduct by certain Deloitte staff members in performing the audits of five companies in 2016 and 2017.

China’s Ministry of Finance has reportedly asked Deloitte to conduct an internal investigation into alleged auditing violations at its China unit.

The move follows reports that a whistleblower sent a 55-page PowerPoint presentation to other employees alleging auditing violations in China. The presentation has since been circulating on social media.

The Ministry said it takes the allegations very seriously and plans to work with other authorities to investigate the allegations.

Hong Kong’s FRC (Financial Reporting Council) issued a statement saying it has met with Deloitte China to understand the background to the allegations and the firm’s proposed response.

The FRC says it told Deloitte that its handling of the allegations must be “robust to instil public confidence that all allegations are being investigated independently”. The FRC is coordinating its actions with other regulators in the Mainland and Hong Kong, it added.

According to Caixin, which first reported on the matter, the alleged auditing violations include improper conduct by certain Deloitte staff members in performing the audits of five companies in 2016 and 2017 – some of which are listed in Hong Kong and New York.

When auditing NYSE-listed RYB Education, the whistleblower was allegedly told “not to be so careful and just fill the numbers randomly” after he found amounts in the audit report that were inconsistent with actual receipts.

In addition, most of the management expenses listed by a Beijing subsidiary of RYB Education were said to actually be for overseas shopping and expenses incurred by the company’s senior executives and their children, such as golf tuition paid for the founder’s child in New York.

The Deloitte partner in charge of RYB’s audit project allegedly accepted beauty salon gift cards and higher audit fees as payment for covering up the company’s financial problems.

Deloitte is also said to have used Photoshop to change inconsistencies in financial statements and fabricated checks on numbers when carrying out audit procedures.

In its initial statement, Deloitte said many of the allegations were previously reported by a staff member and were subject to internal investigative procedures. “Nothing has been found to call into question the sufficiency of our audit evidence supporting our reports,” it said, adding that further allegations will be investigated.

The company has since announced it has set up a special task force to carry out a comprehensive investigation into the allegations. It is also planning to engage an independent review team to direct and oversee its self-inspection.

Additional reporting from Global Times.

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