17.03.2023
Due to the Huarong scandal, Deloitte Accounting Firm, which was audited by the Ministry of Finance of China, closed its Beijing branch for 3 months and confiscated and fined more than 200 million yuan.
(Deutsche Welle Chinese website) Deloitte Touche Tohmatsu, one of the four largest accounting firms in the world, has been punished by the Chinese Ministry of Finance. On Friday (March 17), China’s Ministry of Finance announced the administrative penalty imposed on Deloitte. The announcement shows that the Deloitte head office was given a warning; the business of Deloitte Beijing branch was suspended for 3 months; a total of 211.9044 million yuan was confiscated and fined, and the Deloitte head office assumed joint and several liability.
The reason for the punishment against Deloitte this time is that the Chinese Ministry of Finance found after investigation that Deloitte’s audit of its client Huarong Asset Management Co., Ltd. had serious flaws. According to the announcement of the Ministry of Finance, starting from 2021, the Ministry will inspect the quality of Huarong’s accounting information and the quality of its auditing agency Deloitte.
Huarong is one of four state-owned financial asset management companies in China created in the 1990s to buy bad loans from banks and help revive the state-owned financial industry. Later, Huarong’s business expanded to banking, insurance, real estate finance and other fields. Huarong’s former party secretary and chairman Lai Xiaomin was sentenced to death and executed in January 2021 for bribery, corruption and bigamy. It is one of the toughest punishments China has imposed on economic crimes in recent years. Generally speaking, serious economic crimes may be sentenced to life imprisonment, or a death sentence that can be commuted to life imprisonment after two years with a reprieve, but death sentences without a chance of reprieve have been very rare in recent years.
Lai Xiaomin sentenced to death for corruption and other crimes
The announcement of the Ministry of Finance on Friday pointed out that from 2014 to 2019, Huarong had problems such as failure of internal control and risk control and serious distortion of accounting information to varying degrees. However, Deloitte, which was in charge of auditing Huarong, “failed to pay sufficient attention to the essence of Huarong’s multiple economic businesses, failed to penetrate the real status of the underlying assets of the audit, failed to objectively evaluate the status of the company’s assets, and failed to accurately evaluate the parameters of the expected credit loss model. In short, during the period of providing audit services to Huarong, Deloitte “did not maintain professional skepticism, failed to effectively implement the necessary audit procedures, failed to obtain sufficient and appropriate audit evidence, and had serious audit deficiencies.”
On the day when the punishment was announced, Deloitte Touche Tohmatsu CPA also responded to the punishment by the Ministry of Finance of China with an announcement. The announcement reads, “We have fully cooperated with the Ministry of Finance’s inspection work. We respect and accept the penalty decision of the Ministry of Finance. During the inspection, the Ministry of Finance believes that some aspects of our audit work have not fully met the requirements of the auditing standards. Sorry about that.”
(comprehensive report)
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