The case will be heard by an S.E.C. administrative law judge under a provision of the Sarbanes-Oxley law that requires auditors of foreign companies whose securities are registered in the United States to provide audit work papers when asked to do so by the S.E.C.
An article on Thursday about a Securities and Exchange Commission investigation into possible accounting fraud at a Chinese client of the Shanghai affiliate of Deloitte misstated, in some copies, a provision of the Sarbanes-Oxley law that requires auditors of foreign companies whose securities are registered in the United States to provide audit work papers when requested by the S.E.C.
Even as many employees left or were laid off in recent months, others had to sort through audit work papers and other client files and make sure that they could be understood not only by another auditor but also by the operator of a document storage center, said Lisa T. Fair, a former Andersen partner in Atlanta who now works for Deloitte & Touche.
Most controversially, foreign auditors will have to send audit working papers on their clients to the board if ordered to".We are not some sort of corporate backwater," says Dame Judith Mayhew, chairman of the Corporation of London's policy and resources committee, who complains that the SEC is trying to set itself up as a global regulator.
Deloitte did not do its own audit but instead relied on the work papers of Arthur Andersen auditors.
The first step in any corporate financial fraud investigation is to obtain the work papers of the auditors, so the S.E.C. issued a broad subpoena to Deloitte's Chinese affiliate for those records within days of its resignation.
The investigation by bank regulators with the Office of the Comptroller of the Currency had already been under way for several months by November 2001 when the Ernst auditors began an effort to revise work papers on NextCard, the criminal complaint says.
The practice of destroying drafts and other documents, but keeping the "work papers" that support the auditor's conclusions is "nonsense," says Douglas Carmichael Douglas Carmichael, an accounting professor at Baruch College.
As a result, auditors have tended to "clean up the work papers" and "keep only those necessary to support their opinion," Carmichael says.
And the Chinese government is unlikely to accede to allowing the auditors to respond to a subpoena that would create a precedent for other firms being compelled to disclose their work papers.
