The Talent Shortage Has Gotten So Bad Clients Are Now Doing Their Own Audit Documentation

The Securities and Exchange Commission has charged Deloitte China with failing to comply with fundamental U.S. auditing requirements because in numerous audits over numerous years Deloitte China asked clients to select their own samples for testing and to prepare their own audit documentation.

From the SEC press release:

The Securities and Exchange Commission today charged Deloitte Touche Tohmatsu Certified Public Accountants LLP (Deloitte-China), the Chinese affiliate of the Deloitte global network of accounting firms, with failing to comply with fundamental U.S. auditing requirements in its component audits of U.S. issuers and its audits of foreign companies listed on U.S. exchanges. Deloitte-China agreed to settle the charges by paying a $20 million penalty and agreeing to extensive remedial measures.

The SEC order finds that, in the course of numerous audits over multiple years, Deloitte-China personnel asked clients to select their own samples for testing and to prepare audit documentation purporting to show that Deloitte-China had obtained and assessed the supporting evidence for certain clients’ accounting entries. This created the appearance that Deloitte-China had conducted the required testing of clients’ financial statements and internal controls when there was no evidence in the audit file that it had in fact done so.

“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. “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.”

The SEC order finds that the misconduct involves both junior and senior audit team members and reflected a lack of audit supervision by audit partners. MAN, when they said there’s a critical shortage of auditors and audit supervisors they weren’t kidding.

Director of the SEC’s Enforcement Division Gurbir S. Grewal said this action involves audit failures at the most basic level. “Auditors are vital to the success of our financial markets and the standards they must abide by are neither optional, nor are they aspirational best practices. Rather, they’re foundational to audit quality and investor protection, and every audit firm that conducts audits for issuers with securities trading on U.S. exchanges must meet them. Here, Deloitte-China audit professionals fell woefully short,” he said.

The order also finds that Deloitte China failed to adhere to numerous PCAOB auditing standards, including due professional care of audit evidence, sampling, documentation, internal control over financial reporting, audit supervision, and quality control. Though at this point that’s like giving someone a ticket for not wearing a seat belt after they drive their car off a cliff, of course PCAOB auditing standards were ignored.

In addition to the financial penalty, the order censures Deloitte China and requires the firm to provide copies of “Auditing For Dummies” to all junior and senior staff. Kidding, the firm will complete a review and assessment of its policies and procedures by an independent consultant retained by Deloitte Global. The order further requires Deloitte China to implement a plan to address deficiencies identified by the independent consultant that is approved and overseen by Deloitte Global, and to subsequently undergo several additional annual reviews. The order also requires Deloitte China to require additional training over three years for all of its audit professionals who serve U.S. public company audit clients.