Updated: Dec. 8, 2011 (Initial publication: Sept. 20, 2011)

Sectorial Analysis

II-6.24: The American financial regulator filed a motion to compel before a Federal Court to force an auditor to reveal documents concerning a Chinese company it had audited, even though the revelation of such documents is prohibited by Chinese law

by Armand Paris

Translated Summaries


A Chinese company issued shares on American exchanges, and was subsequently the subject of a Securities and Exchange Commission (SEC) investigation. The company’s auditor concomitantly revealed frauds it had discovered during its review of the company’s accounts. The SEC sued the auditor on May 27, 2011 in order to force it to communicate the documents it held. The auditor refused, arguing that Chinese criminal law prohibited the revelation of such documents. The SEC filed a motion in Federal Court to compel the auditor to comply with its request on September 6, 2011.



Une société chinoise lève des fonds aux Etats-Unis, puis fait l’objet d’une enquête de la part du régulateur financier nord-américain. Parallèlement, l’auditeur de la société dénonce des fraudes qu’il a découvertes par l’examen des comptes. La SEC assigne l’auditeur le 27 mai 2011 pour obtenir communication des documents qu’il détient. L’auditeur refuse, arguant de l’interdiction par le droit pénal chinois qui prohibe. La SEC saisit le 6 septembre 2011 le juge fédéral pour que celui-ci contraigne l’auditeur.



Informe Temático (Finanza): el regulador financiero americano presentó una moción para obligar ante una Corte Federal a un auditor para que revele documentes concerniendo una compañía china que había auditado, aunque la revelación de dicho documente es prohibido por la ley china.

Una compañía china emitió acciones sobre intercambios americanos, y fue subsecuentemente el sujeto de una investigación del Security and Exchange Commission (SEC). El auditor reveló fraude que había descubierto durante su revisión de las cuentas de la compañía. El SEC demandó al auditor el 27 de mayo del 2011 para forzarlo a comunicar documentos en su posesión. El auditor se rehusó, argumentando que el derecho criminal chino prohibía la revelación de dichos documentos. El SEC presentó el 6 de septiembre del 2011 una moción en la Corte Federal para obligar al auditor a obedecer estas órdenes.



Other translations forthcoming.

Context and Summary

The Longtop Financial Technology of China Corporation’s auditor was Deloitte Touche Tohmatsu, a firm based in Shanghai. The auditor discovered frauds in the corporation’s accounts, which the auditor revealed to the American securities regulator, because the audited corporation had issued shares on American exchange in 2007.

The Securities and Exchange Commission (SEC) sued Deloitte Touche Tohmatsu on May 27, 2011, as part of its investigation of the Longtop Financial Technology of China Corporation, in order to force the audit firm to reveal the documents it possessed proving the fraud—documents that the regulator wanted to use in its own investigation.

The audit firm refused on the grounds that Chinese criminal law prohibited the revelation of such documents. The American regulator took this as tantamount to an obstruction of justice, and filed a motion to compel before the Federal Court, Washington DC District, in order to force Deloitte Touche Tohmatsu to communicate these documents.

The SEC’s enforcement director declared that obeying the SEC’s orders is not optional, it is a legal obligation, and non compliance will result in serious legal consequences.

Brief commentary

This case is simpler than most others that are addressed in these pages, but it is revelatory of a frequent situation: the conflict of regulation. One country’s rules forbid what another’s make mandatory. This is a failure of interregulation, since the Chinese company that had issued shares on American exchanges was multinational in scope.
First of all, regulation’s complexity is not the major problem for companies (more complexity simply means more expense). The major problem is when regulation is incoherent, as in the present example.
Secondly, both rules are in direct contradiction with one another: the Chinese rule is a rule of abstention (do not do something, the classic definition of criminal law), while the American rule is an order to behave in a certain way (modern definition of repressive law as facilitating the effectiveness of ordinary rules). Regulatory law better corresponds to the second type of rule, and therefore we believe that it may emerge as the winner.
Thirdly, the second rule’s potential success in this case is even more probable since we are dealing with the audit. The rules concerning the audit are becoming stricter everywhere, and it would be contrary to the movement of history to allow a corporation to commit fraud without allowing the regulator to punish the fraud because of auditors’ withholding the necessary information. This would go against the American and European idea that the role of the audit is to protect investors by informing the financial market of potential risks.
National rules derived from classic criminal law are worthless against this backdrop. But, the auditors must also be protected from punishment under Chinese criminal law. This allows us to measure the extent of the power struggle between national legislatures.

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