January 16, 2013, 6:00 a.m. ET
Deloitte Tightens Client Screening After China Scandals
By MARIKO SANCHANTA And DUNCAN MAVIN
A spate of recent accounting scandals in China has forced Deloitte Touche Tohmatsu Ltd. to beef up its audit work and tighten the process for screening new clients, according to the head of the firm's Asia practice.
Deloitte's Asia Pacific CEO, Chaly Mah, said the firm has specifically changed the work it does to test cash balances and introduced more stringent tests to determine whether to take on potential clients, for instance.
"We have a multilayer process but if you have clients that are less than honest it is not easy," he said in an interview with The Wall Street Journal.
Deloitte is currently embroiled in a dispute with the U.S. Securities and Exchange Commission over the firm's work in China. The SEC brought an administrative proceeding against it and other accounting firms for refusing to hand over documents sought in investigations of alleged accounting frauds at nine Chinese companies. The auditors say that handing over such documents would breach Chinese law.
Mr. Mah said he believes the firm wasn't "unfairly targeted" by the SEC. "This is about access to working papers," he said.
U.S. regulators have attempted to investigate alleged fraud at some Chinese companies, and the SEC has filed several lawsuits in relation to those issues. But the SEC has been unable to get information from the China-based firms that audit many of these companies, including Chinese affiliates of the Big Four - Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG.
Dozens of Chinese companies have raised billions of dollars in the past decade listing their shares on U.S. and Canadian exchanges. But the share prices of some of those companies have plummeted amid questions about their bookkeeping and financial disclosures. In Canada, the top securities regulator accused Ernst & Young's Canadian affiliate of missing problems during its audit on Sino-Forest Corp., a Chinese timber company listed on the Toronto Stock Exchange that filed for bankruptcy protection amid allegations of accounting fraud.
Deloitte, the second-biggest auditing firm in the world after PwC, said its margins in China had recently been squeezed by a slowdown in economic growth and capital markets. But the company is still on track to increase the numbers of employees in the Chinese market to 15,000 by 2015, from 13,000 now.
Deloitte will on Thursday also announce its formal entry into Myanmar, what it calls the "biggest opportunity" in Asia. It follows a raft of multinationals hoping to profit from the