CASE 8.1
LONGTOP FINANCIAL TECHNOLOGIES LIMITED
Synopsis
Longtop, an information technology (IT) company, was founded by two Chinese friends in the
late 1990s. The company’s business model was oriented around providing IT services to China’s
rapidly growing banking industry. Because Longtop’s common stock was listed on the New York
Stock Exchange, it was subject to the regulatory overview of the SEC. From 2004 to 2011, the
company’s audit firm was Deloitte & Touche Shanghai (D & T Shanghai), the Chinese affiliate of
Upon learning of the allegations, D & T Shanghai chose to extend its audit of Longtop’s 2011
financial statements with a particular focus on re-confirming the company’s year-end cash balances.
Almost immediately, Longtop officials interfered with the planned extension of D & T Shanghai’s
cash confirmation procedures. In fact, the Longtop officials confiscated certain of D & T’s audit
workpapers. A few days later, D & T Shanghai resigned as Longtop’s auditor.
During the same timeframe that the Longtop debacle was taking place, there were other
comparable cases in which affiliates of Big Four accounting firms resigned as the auditors of
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Longtop Financial Technologies Limited—Key Facts
1. Longtop was founded in 1996 by two Chinese friends, Jia Xiao Gong and Weizhou Lian.
2. Longtop’s business plan involved providing IT services to China’s rapidly growing banking
industry.
4. Near the completion of the fiscal 2011 Longtop audit, allegations surfaced that company officials
were engaging in an accounting fraud to embellish the company’s financial statements.
6. Longtop was subject to the regulatory oversight of the SEC since the company’s common stock
was listed on the NYSE.
8. By mid-2012, the PCAOB had yet to inspect any of the several dozen Chinese accounting firms
9. The Longtop case and several other Chinese accounting scandals during the same timeframe
10. Adding to the controversy was the refusal of D & T Shanghai to provide its Longtop audit
workpapers to the SEC, which, at the time, was investigating the Longtop accounting fraud.
382 Case 8.1 Longtop Financial Technologies Limited
Instructional Objectives
1. To demonstrate how cultural and political values can influence a nation’s financial reporting
system and independent audit function.
2. To provide students with a better understanding of the global accounting profession, including
the role that the major international accounting firms play in that profession.
Suggestions for Use
By the time you assign this case, there may have been additional significant developments in the
ongoing tete-a-tete involving the SEC/PCAOB and the Chinese government. Consider having your
students research such developments and provide brief in-class reports on them.
Previous editions of this casebook included a fairly lengthy case entitled Zuan Yan that provided
Suggested Solutions to Case Questions
1. Note: None of the professional standards include a discussion of “auditability”—which may or
may not be an actual word. To address the issue of what conditions or circumstances must be
present for a company to be “auditable,” a good starting point is the formal definition of “auditing”
presented decades ago by the AAA Committee on Basic Accounting Concepts.
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my view, the issue of auditability revolves around the availability of reliable, relevant, sufficient, etc.
audit evidence.
There are a number of other second-order conditions or circumstances that one could identify as
precursors to auditability. For example, auditor independence is clearly a precondition for
performing a proper audit of a given entity. If an auditor is not independent, then, by definition, it is
impossible for him or her to collect audit evidence that meets the criteria of reliability, relevance,
2. The answer to this question seems to turn on the key term “uniform.” No doubt, cultural and
political differences across individual nations and regions of the world impact how independent
audits are performed. For example, in Islamic countries religious law or shari’a has a significant, if
3. Assuming that Acme is an SEC registrant, which most large multinational companies are, AU
Section 543, “Part of Audit Performed by Other Independent Auditors,” of the PCAOB’s Interim
Auditing Standards would be the relevant U.S. auditing standards in this context. Acme’s U.S. audit
firm would qualify as the “principal auditor” in this set of circumstances. As the principal auditor,
the U.S. audit firm would have to decide whether to assume responsibility for the work of its
Chinese affiliate. In most such cases, the U.S. auditor would assume responsibility for the work of
384 Case 8.1 Longtop Financial Technologies Limited
Whether or not the principal auditor chooses to refer to the work of the affiliate in its audit
report, the principal auditor must make certain inquiries of the affiliate (“the other auditor”). For
example, the principal auditor should inquire of the affiliate to determine if it is familiar with U.S.
If Acme was not an SEC registrant, then the AICPA Professional Standards would be relevant in
this context and define the responsibilities of the company’s U.S.-based audit firm. The principal
section of those standards that would be relevant is AU-C Section 600, “Special Considerations—
Audits of Group Financial Statements (Including the Work of Component Auditors).” This section
of the AICPA Professional Standards defines in detail the responsibilities of the “group engagement
partner” and the “group engagement team” under varying sets of circumstances. An excellent
summary of this relatively new section of the AICPA Professional Standards can be found in the
following article: Thomas, C.E., and P.D. Wedemeyer, “Clarifying the Standard for Group Audits,”
Journal of Accountancy, March 2013. Similar to AU Section 543 of the PCAOB’s Interim
(AU-C 600.05).
Section 600, “Special Considerations—Audits of Group Financial Statements (Including the
Work of Component Auditors)” is the relevant section of the ISA’s in this context. Section 600.04
notes that “the group engagement partner is required to be satisfied that those performing the group
audit engagement, including component auditors, collectively have the appropriate competence and
capabilities. The group engagement partner is also responsible for the direction, supervision, and
4. As a point of information, China was not the only country that “arched its back” in opposition to
the PCAOB’s insistence on “inspecting” foreign accounting firms. The PCAOB, for example,
encountered considerable resistance in this respect from Japan.
Given the importance of the independent audit function to the free flow of capital in the
increasingly global economy of the modern age, it seems reasonable to suggest that the need for high
quality independent audits should be addressed at the highest level. That is, one could argue that
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5. There is no disputing that ethical and moral values vary across cultures and nations.
Whistleblowing is considered ethical in some cultures and not in others; some cultures consider large
disparities in salaries between corporate executives and their lower-level subordinates to be
unethical, while others do not; and so on, and so forth. As a result, it seems unlikely that the global
1. Responsibilities
2. The public interest
3. Integrity
4. Objectivity and independence
5. Due Care
6. Scope and nature of services
For the most part, it seems that these principles would not be controversial in most societies.
However, consider the “public interest” principle. The definition of “public interest” almost
certainly differs between a communist country and a democratic nation. In both types of countries,
there is a wide range of parties that rely on accountants and auditors. Generally, in the United States,
the interests of investors and creditors are of paramount concern to accountants and auditors. On the
386 Case 8.1 Longtop Financial Technologies Limited