SEC hits Deloitte's China affiliate with $20M penalty

The Securities and Exchange Commission imposed a $20 million penalty on the Chinese affiliate of Deloitte Touche Tomahotsu, accusing the accounting giant's arm of failing to comply with "fundamental U.S. auditing requirements."

Driving the news: On Thursday, the financial watchdog charged that, over the course of several years, Deloitte's China employees allowed clients to choose their own samples for audits and prepare documents, creating the appearance that the firm had conducted the due diligence.

Why it matters: Auditing Chinese companies has been one of several flashpoints between Washington and Beijing, at a time when both the U.S. and Chinese economies are weakening amid an ever-lengthening list of geopolitical grievances.

• Last month, the two superpowers struck a deal to allow inspections of China-based audit firms, in a bid to avert the mass delisting of hundreds of Chinese companies that trade on domestic markets.
• As of March 31, there were 261 Chinese companies listed in the U.S. collectively worth hundreds of billions of dollars, according to data from the U.S-China Economic and Security Review Commission. Since the 1990s, over 500 have listed on the New York Stock Exchange alone, Forbes notes.

What they're saying: In a statement, SEC Chair Gary Gensler said Deloitte's China arm “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.

• “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," he said, adding that the incident underscored the need for U.S. authorities to inspect Chinese audit firms."

Zoom out: The increasingly fraught Sino-American bilateral relationship isn't the only issue at stake. With markets in turmoil and the economy teetering, Wall Street's sheriff has been on an enforcement tear, under pressure to prove it's looking out for investors.

• The accounting industry is just one of the SEC's latest high-profile targets: In June, the regulator slapped a $100 million fine against Ernst & Young (EY) for ethics lapses. It was the largest penalty ever imposed against an audit firm.