An internal employee reports irregularities and violations of audit ethics within Deloitte on multiple audit projects. (Image source: Adobe Stock)
Recently, Deloitte Touche Tohmatsu’s Beijing office has been on the hot search. An internal employee reported Deloitte’s internal irregularities and violations of audit ethics in several auditing projects. A number of companies were involved, including Red Yellow Blue, which was once famous for child abuse, as well as Sinotrans and Burch Environmental.
On Feb. 5, Deloitte officially responded to the internal employee reporting incident circulating on the internet. According to Deloitte, we are aware of a number of queries currently circulating on social media platforms regarding Deloitte Beijing’s individual audit projects in 2016 and 2017. In fact, the firm has previously received a related matter reported by an employee through internal channels and has conducted a full investigation into the matter and found no evidence that affects the adequacy of our audit work and therefore the related audit work supports our audit opinion. We will investigate any queries we receive.
According to Interface News, on the evening of February 3, a group of Deloitte Beijing employees sent a 50-page PowerPoint file to the company’s email, reporting some non-compliant people and events during their four years of work.
According to the PPT, the whistleblowers reported the irregularities of Deloitte in the audit process, such as “releasing” and failing to implement the voucher procedure, by reporting themselves and relaying the reports of others.
The so-called “release”, in the audit work, is mainly “audit procedures are not implemented”, in the bottom of the draft to write their own audit procedures have not done.
From what has been revealed so far, the violations reported by the employee involve many mainland listed companies. The Deloitte employees involved not only include senior managers and senior auditors, but even partners are also involved.
According to Phoenix Finance, it got a “letter of apology” signed by “YW” (editor’s note: YW is the code name of Deloitte’s employee who reported the incident). The letter stated that “Deloitte management and RRG (Deloitte Reputation and Integrated Risk Management) have overstepped the ethical boundaries of auditing.”
Interface News reported that the mainland companies involved were Sinotrans, Boqi Environmental Protection, and Red Yellow Blue, a company known for its child abuse cases.
Sinotrans is the unified operating platform and brand of China Merchants Group’s logistics business, and is listed on both A+H.
The whistleblower made extensive reference to his key involvement in Sinotrans’ 2016 audit irregularities between Nov. 7 and Nov. 25, 2016. The whistleblower alleges that Deloitte’s personnel “let the plane out” during the audit process, which is a serious departure from audit ethics.
Red Yellow Blue is a U.S. listed company with nearly 1,300 parent-child schools and nearly 400 high-quality kindergartens.
In 2017, a number of vicious child abuse incidents broke out in Red Yellow Blue, and a kindergarten in Chaoyang District, Beijing, where children were stabbed with needles and fed with unknown white pills by teachers.
And on September 27, 2017, Red Yellow Blue was listed on the U.S. New York Stock Exchange. The audit irregularities involved in the whistleblower’s PPT also occurred in 2017. When Deloitte conducted the audit of Red Yellow Blue for 2016, the relevant project leader made up random dates and amounts in the underlying draw voucher work. The whistleblower said that the voucher draw, as an important audit procedure in the audit, plays a very important role in detecting possible fraud.
The whistleblower’s ex-colleagues also found that the overhead expenses of the Beijing training school under Red Yellow Blue were basically reimbursements for overseas spending by executives and the chairman’s children, such as a large amount of management shopping abroad, outlet spending, high spending by the founder’s son in New York, and golf learning. Deloitte managers and partners identified this issue in the previous year’s audit, but in the following IPO audit classified overhead as an accounting item not subject to detail testing, but simply reviewed.
According to Huaxia Times, Deloitte’s partner in charge of the Red and Blue project was alleged to have accepted beauty cards worth tens of thousands of yuan from Red and Blue and increased the audit fee for the second year of the Red and Blue project, asking Deloitte to help cover up some problems at Red and Blue, which seriously violated the audit independence policy.
In addition, the whistleblower’s former colleagues pointed to Deloitte’s irregularities in the environmental audit work of another Hong Kong-listed company, Boqi.
The Boqi project allegedly found widespread signs of inventory impairment during the audit monitoring in Yangcheng, Shanxi, where many inventories had actually reached the impairment criteria, but the Deloitte project manager refused to provide for impairment and sent someone to re-monitor the inventory, resulting in a report that there was no abnormality in the audited unit’s inventory.
The whistleblower believes that there are serious problems with Deloitte’s audit quality, and many auditors have forgotten the audit ethics and fail to be honest themselves, and even think that drawing vouchers is not important and will hardly detect signs of fraud. These behaviors seriously damage the order of domestic and foreign financial markets, affect the quality of audit reports, and bring great risks to the investment decisions of expected users of domestic and foreign statements.
According to Eastern Fortune Choice data, as of February 4, 2021, Deloitte provided audit services for 60 A-share listed companies, 326 Hong Kong-listed companies and at least 39 other Chinese stocks.
After the incident fermented, Sinotrans’ Hong Kong shares closed down 4.68% and its A-share price slid 1.23% on Feb. 4; while Bochy’s share price also fell 7.41% year-on-year on the same day.
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